125 | The Case for Ignorance
For some reason, many people think they should be more in tune with their investments than they are.
It's some mixture of guilt, embarrassment, or feeling like “being in tune” is what it means to be an adult.
But I'm not certain this is a reasonable or appropriate expectation.
We don't expect everyone to be able to play a guitar riff. Or cook a gourmet meal. Or run a half marathon. Or moderate a heated discussion.
I don't know why investments should be any different, but scrolling stock tickers on CNBC and annual investment updates with an advisor often contradict this belief.
Once we've cared for a few important basics, I'd argue that the less we know, the better off we will be.
Most investment performance analysis reduces investment return to a single number.
"For the past 10 years, this investment has returned 8% annualized."
But that is comically misleading - it's not far from assuming a tombstone with a birth date and a date of death is the entire life story of the person who passed.
One way to an 8% return over a decade is investment gains for 7 or 8 years followed by investment losses to close out the decade. This could look like...
But how cheap is the line?
It doesn't begin to capture the emotion of the last two years - a line doesn't capture the emotion of feeling less wealthy than you once were. Or the envy of your prior self. Or the temptation to make a change. Or the paralysis of not wanting to do anything for the next few years until you get back to your arbitrary high-water mark.
Another way to an 8% return over a decade is investment losses or modest gains for 7 or 8 years followed by phenomenal investment gains to close out the decade. This would look like...
But this line is as cheap as the first one.
It fails to capture the second-guessing, self-doubt, frustration, or temptation to abandon the plan for the first 7 or 8 years of the decade. There aren't many feelings in finances that are harder to navigate than the persistent question of "Am I doing this all wrong?" - and assuming that the tuned-in investor can push that question off for 8 years to experience the pay off in years 9 and 10 is extending quite the benefit of the doubt.
Another way to an 8% return over a decade is lack of awareness around exactly how it came to be. This would look like...
At seeing those starting and ending points, I think most people would be surprised, amazed, grateful, or even struggle to comprehend how it happened. No second-guessing, no comparison to others, no wondering what could have been, and no arbitrary high-water marks. Just awe over progress that came from money working for them.
It doesn't take a PhD to realize which set of emotions you'd prefer to experience over a decade or lifetime.
Once you've cared for some basics, I think it's OK to be a little ignorant.