Non-Financial Factors

We’ve talked a lot about stuff that happens inside your portfolio. But what about stuff that happens outside of it? What about the non-financial factors that affect financial decisions?

Tunnel vision

Everything in life sits within a greater context. Nothing works in isolation, everything is connected. There is no point maximising one area whilst completely neglecting the others. The richest man in the world would give up all of his money to be healthy if he was on his deathbed due to poor health choices. The best football player in the world at any given time might still be unhappy if his wife cheats on him or his mother doesn’t like him.

The point is this: nothing operates in isolation. This is one of the issues I have with a goal-centric approach to investing (and life): as with any metric that is measured, this tends to be the only thing you care about, at the cost of everything else. If the goal is the only thing you really care about, then fine. But this is very hard to determine a priori. How many injured athletes regret pushing themselves too hard? How many corporate-ladder-climbers regret not seeing their children grow up? How many investors regret going “all-in” seeing an opportunity to hit some target…and end up going bust?

These things happen because people become obsessed with a goal and neglect other aspects of their life. It makes you more likely to achieve that goal, sure, but at what cost?

One shot, one opportunity

You only get one chance at lifetime wealth creation.

When you’re 80 and broke because you invested everything into the latest crypto craze that your questionable mate assured you was a “sure thing” and “the future”, you don’t get to go back a few years (or a few decades) and try again. You lost. Investing isn’t some experiment that you can re-run with different conditions to see if there is a different outcome.

The average will not save you, either. Just because the average return of some collection of assets is 10% over 10 years, doesn’t mean that you will get close to 10% by owning some of these assets. Just because some assets have returned 15% historically, doesn’t mean that you will receive 15% in the future. Just because the market returned 10% over the last 20 years, doesn’t mean that this is your return, even if you were invested over the same period. You may have bought and sold at different times or transaction costs (both yours and the funds’) and taxes may have reduced your returns.

Investing is non-ergodic, something we have mentioned before. This means that what is likely to happen to you over time is different from what is likely to happen to the average investor.

You are not the average.

Shit continues to happen

Again, we have already covered this in detail, but the point is important so warrants repetition: in life, shit happens. This means that the return you thought you were going to get by investing in assets for the “long-term” may not actually materialise because your “long-term” turns into “medium-term” when you need the cash in a pinch. This also has the unfortunate consequence of you not deciding when exactly to liquidate your assets. This could be smack bang in the middle of a bear market.

Invest or die trying

No one said you have to invest. No one is putting a gun to your head and forcing you to buy FTSE 100 ETFs. It’s your money and ultimately only you can and should decide what to do with it. The best thing to do may not be to invest in financial assets.

Sure, you probably want some type of emergency fund and some investments for retirement, but outside of this, it’s not clear that everyone should be investing the rest of their money (in the traditional sense).

The most important investment you can make is the investment in yourself. Maybe buy some books, buy a course in marketing, enroll in an MBA at Harvard (don’t do this), or spend your money in other ways that will improve YOU. Investments in yourself, like in financial assets, compound, so should also be done early and often.

Or maybe there is something specific that you need money for that isn’t compatible with investing. Let’s say you want to start a business in two years’ time – you need money for that but it’s probably not worth investing because the timeline is so short. Or maybe you want to buy a house in 5 years time – again, I wouldn’t recommend most investments with this timeline in mind.

It’s all about timing

Just as financial assets have a rate of return, so too does your time. Again, we have touched on this before – one must always consider the time cost of any financial gain. A 0.1% improvement in your rate of return due to some elaborate tax scheme, or constantly changing savings accounts is not worth it unless you are very, very rich. Use the Pareto Principle: do things that really matter, forget the rest. Do things that determine 90-95% of your return and forget the minor details that make a minuscule difference but have a high time cost.

Sleeping at night

Every decision has some type of cognitive load. Minimising superfluous decisions allows your brain to focus on more important things – like who will win Love Island this year, whether you did actually leave the oven on, is wearing white jeans too much a social faux pas, and other important topics. When you invest you want to make a few impactful decisions and that’s it. If you have to decide every second/minute/hour/day/week whether to sell your positions or not, you’re going to spend a lot of time making investment decisions. This isn’t necessary.

Then there is the psychological cost of investing. I know, I know: everyone does this, all the books written by personal finance gurus tell you to do it, historically this strategy has worked very well, etc…but what if? What if asset X suddenly drops massively in value? What if the company goes bust? What if the government devalues its currency or defaults on its loans? Your lifetime savings can be cut in half overnight. These costs must be taken into account too. If you find this unbearable, either ban yourself from checking your portfolio on a regular basis, get professional help, or simply don’t invest in these types of assets. Sleepless nights and perpetual anxiety really aren’t worth it in most circumstances.


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