The financial media is filled with stories of outstanding investors and their market-beating returns. There is some value in these tales as they can be illustrative of larger investment truths. However to the degree to which they cause return envy they can be counter-productive.
Two bloggers recently wrote on the topic of how return envy can distort our investment plans. Carl Richards writing at the Bucks Blog notes how the rate of return is really only one part (of four) of any financial plan. He notes that any financial plan involves a balancing act:
Notice that only one of the questions has to do with investments. Yet most of what we read, most of our anxiety and most of what we think about involves the rate of return. But rate of return is only one small part of the equation. If you don’t want to deal with the risk of investing in the stock market, you can make another trade-off. Save a little more if you can. Or if you can’t, consider retiring a little later or pursuing a second career.
Tom Brakke at the research puzzle has similar thoughts on how we work ourselves into knots trying to keep up with the investment Joneses. This tendency to compare ourselves to others can lead us into inappropriate investment strategies ill-suited to our needs. Brakke writes:
Like yoga, investing should be an intensely personal activity. You should observe and learn from others without measuring yourself by them. But we have difficulty doing so…It is important to evaluate your investment approach with great rigor. But it is critical to remember that looking across the market room at what someone else is doing is unlikely to lead you to your own personal investment nirvana.
At the end of the day it is not the level of the Dow that matters. It is the ability of your portfolio to fund those activities that are important to you and your family. To the degree to which market moves affect those than by all means, take heed. However don’t let return envy drive your investments off in a direction from which they can’t recover.
