"Am I Ready to Invest?" Part 8: The Investor's Mindset

Well, here we are: the final post of the “Am I Ready to Invest?” series. I hope you’ve made it through the seven previous posts in the series before arriving at this point, but in case you haven’t (or if you need a refresher), here they are for quick reference:

We’ve covered the necessity of an emergency fund and the details of having one. And we’ve covered the harmful effects of high-interest debt and the necessity of eliminating it. Now all that’s left to cover in determining your readiness to invest is the investor’s mindset, i.e. the mental attitude of the successful investor.

Why would having the right mindset be so important in preparing to become an investor?

Think of it in terms of the following example. Let’s say that you are someone starting from square one: zero investing experience, zero dollars in an emergency fund, and maybe a small amount of high-interest debt. And let’s say that you found your way to this blog and read the first seven posts in the “Am I Ready to Invest?” series.

Let’s say that you followed and implemented over time everything you read in the series. You began an emergency fund in a high-yield savings account and built it up to its initial $1,500 target. You then systematically eliminated every cent of your high-interest debt. Now you’re in a position to start splitting your monthly savings between continuing to build up your emergency fund and beginning to invest.

Excellent.

But let’s also say that at this point, you never, for the rest of your life, seek out any investing knowledge from any other sources, and that I end the entire blog at this point by telling you that there has never been a 20-year period in history when the U.S. stock market in its entirety did not provide a positive return (it’s true; there never has been).

So you then act on that information and go out, buy your first-ever shares of a total U.S. stock market index fund, and then plan to continue to make additional contributions to it every single month for rest of your career.

What do you think would be the ultimate outcome of this scenario?

I’ll tell you what it would be in the vast majority of cases: failure to meet your financial goals.

But why?

You had a solid financial foundation (emergency fund + no high-interest debt). Your investment plan, though certainly incomplete, was not necessarily wrong. So once you reached age 65, why did you find you had fallen short?

The answer is that although you possessed all of the above, you lacked the mindset necessary to process and rightly respond to all financial occurrences between that starting point and age 65. In other words, you had a lot things right at the beginning, but you also weren’t prepared for what was coming. You didn’t have the mindset needed to navigate those waters successfully.

So let’s talk about what that mindset is. What is the mindset of the successful investor?

I would boil it down to three components: (1) having the drive necessary to meet your financial goals, (2) knowing that you’re your own worst enemy, and (3) framing financial decisions in terms of your long-term financial future. Let’s talk about each one.

1. Having the Drive Necessary to Meet Your Financial Goals

I’m going to say something here that you may not like to hear, but it’s true. You may also think it sounds judgmental. It isn’t judgmental. But it’s still true.

I cannot help you reach your financial goals if you do not want to be helped.

What do I mean by that? I mean that you have to want to reach your financial goals, and you have to be willing to do what it takes to get there, just like anything else in life worth pursuing. I cannot help you meet your financial goals (nor can anyone else, for that matter), if you are not willing to put in the effort required to meet them.

Take the goal of a financially secure retirement, for example. The drive I’m talking about is more than simply liking the idea of a financially secure retirement. Almost all adults on planet earth like that idea. Relatively few are willing to do what it takes to get there.

You could read every post currently on this blog and every post to come in the future, but if you lack the drive to meet your financial goals, any and all knowledge you gain from your reading won’t matter one bit. A lot of knowledge about investing + little or no response = a lot of knowledge about investing. It does not equal a financially secure retirement.

Thinking, “yeah, I should probably save a little for retirement here and there and invest it in some funds,” then sporadically saving money at variable rates for 40 years and moving it from whatever mutual fund performed the best one year to whatever mutual fund performed the best the following year isn’t going to cut it, either.

To be a successful investor, you must have the drive necessary to meet your financial goals. I don’t mean obsession. Nor do I mean logging in and checking your investments every day. I mean drive, the motivation to get where you want to go and to keep yourself consistently on track, day in, day out.

Do you have it?

2. Knowing That You’re Your Own Worst Enemy

You’re your own worst enemy when it comes to being a successful investor. I promise you that’s the case. Want to know why?

It’s because financial history is replete with examples of investors who shot themselves in the foot.

Want a brief recent example?

During the Global Financial Crisis of 2007-2008 and immediately following, we saw any number of awful financial decisions being made by investors, including professional investors. But let’s say you were a 50-year-old average Joe looking at your retirement account in the first quarter of 2009, and you just couldn’t take it anymore.

You had lost a lot of money (on paper), and you thought, “I’m 50 years old, I’m planning to retire in 15 years, the financial crisis keeps getting worse, and I just can’t afford to lose any more of my retirement money. Who knows if stocks will ever go back up?” So you sold out of all your stock mutual funds and decided to leave it in cash moving forward. You were so shaken by the financial crisis that you didn’t invest any amount in stock mutual funds again until January 2012, “now that things have calmed back down,” you said.

That was an irrecoverable error.

You, the 50-year-old average Joe sold near the bottom of the bear market (we’ll cover what a bear market is in a future post), thus permanently locking in financial losses from which you no longer had time to recover prior to age 65. The loss was too great, and your timeframe for recovery too short. That meant a permanent, large reduction in the amount of money available at retirement.

You got scared and sold near the bottom. You were your own worst enemy. And you paid a price for it.

Now, did that happen to actual everyday people during the financial crisis? Boy, did it ever.

I don’t offer that example to scare you. Please don’t allow yourself to become so paralyzed by fear of “messing up” in your investing that you don’t invest at all, or that you think there’s no way you’ll be able to handle it.

I offer that example to point out to you now, at the outset, that you are your own worst enemy to your investing success. And knowing that right now, before you start seriously investing, is invaluable, because you know that for the rest of your investing lifetime, you’re going to have to take into account your own irrationality and emotions.

Successful investing is probably 10% knowledge and 90% behavior. You’re going to learn the right principles to follow. But will you follow them when under pressure?

3. Framing Financial Decisions in Terms of Your Long-Term Financial Future

When it comes to financial decisions, a successful investor thinks of the decisions in terms of how they will affect his or her long-term financial future. For a long-time investor with a lot of money, these decisions will have scaled up to larger matters than, say, everyday finances. For the rest of us, however, these decisions come down to a lot of significant financial decisions at the more basic level.

To be fair, most of us do not go through our everyday lives thinking about every way we spend money in terms of “How will this affect my retirement security?” Nor should we necessarily. I think we can agree that no one wants to be burdened with the thought of “I could have invested this money if my family and I had eaten only rice and beans this whole week and didn’t buy our normal grocery purchases.” No one wants to live like that.

That said, what about when a more significant decision is on the table, one with higher financial stakes? How about when it comes to the cars we choose to drive? What about choosing to lease a brand-new vehicle every three years instead of outright purchasing a good used car and driving it until the wheels fall off, hopefully being able to keep it running reliably for 10+ years?

There’s a big difference between those two options. The first is a regular monthly outflow of money. The second may be a monthly outflow for a while with a used car loan, but it doesn’t stay that way. Eventually you pay off the auto loan, and then from that point until the need for a replacement car, the money you could have spent on monthly lease payments for years could instead be invested.

Could that make a big difference to your financial future? You bet it could!

That’s just one example of many that I could present here. The point is that part of a successful investor’s mindset is thinking through things like this and determining how they might affect one’s future financial picture. It doesn’t necessarily mean living a bare-bones lifestyle for your whole life, but it does mean thinking through financial decisions in such a way that you focus less on short-term gratification and more on long-term benefit.

That’s not easy, and it doesn’t come naturally for anyone. And that’s exactly why you need to make it part of your mindset as an investor.

Conclusion

So this is it: the end of the “Are You Ready to Invest?” series. At this point, if you’ve read through everything, I hope that I’ve given you a lot to think about (and hopefully implement, if you haven’t already).

You can meet your financial goals through becoming a successful investor. I know you can.

So with everything thus far serving as something of a foundation and way for you to assess your readiness to invest, let’s move forward into covering some basics of investment knowledge.

Next post: “‘God Will Take Care of Me’ Is Not a Retirement Plan”