A Tip for Successful Investing - Move from “Binary” to “Directional” Thinking
“Clarity means being very clear about the direction you want to go, but very flexible about how you will get there.” (Bob Johansen)
It sometimes feels like there is a lot of black-or-white thinking in the world today. Many issues are presented as if there are only two, opposite choices.
Think of things like Brexit, or the value of lockdowns. In these sorts of cases, the arguments for and against don’t leave much room for a middle ground.
Psychologists refer to this as binary thinking. It is where something is either good or bad. It is either helpful, or harmful. You are either in, or out.
Humans are predisposed to think this way because it feels safer and easier to do so. Given how complex the world can be, it is much simpler to see things in this way. Instead of hundreds or thousands of possibilities, we only need to consider two, opposing options.
What about the grey?
However, the problem is that this lacks accuracy. The world is full of grey areas, and the truth often lies in the middle of two extremes.
This is an important consideration for investors. Since markets are such complex places, it is much easier to be binary, but this can lead to us making false, and often unhelpful choices.
Should we invest in South Africa, for example, or only offshore? Is it safe to invest in the stock market, or should we only invest in ‘low risk’ options like income funds?
These kinds of questions assume that there isn’t a balance between all of these things, when there always is. The best solution is almost always to diversify your exposure and therefore your risk.
Perhaps most unhelpfully of all, investment choices are often weighed up by the biggest binary point of all – whether we are out-performing or under-performing something or someone. That could be an index, or it could be our mates at the tennis club.
What do you really need?
The truth, however, is that most of us don’t actually need out-performance. Very few people are investing their money just to feel the thrill of making more money.
Almost all of us are building our wealth for a purpose. That may be to support ourselves late in life when we are no longer working, or to pay for our children’s education.
And if we are investing for a particular outcome, that means that it is not just about trying to get the best possible return. What matters is the outcome. We should therefore want to invest in a way that will give us the best possible chance of meeting our objective, with the lowest possible risk.
How we do this is not an either-or, binary question. It is about planning ahead. Over the long term, markets will go up and down, and at some points you will undoubtedly seem better off, or worse off, than others.
What is important, however, is knowing where you are on your journey to the outcome that you are after. Are you still moving closer, and are you still maximising your chances of getting where you want to be?
A different kind of thinking
This is directional, rather than binary thinking. It is knowing where you are pointing, why you are going that way, and understanding that it won’t be a straight path.
Importantly, it will never be about choosing just one thing or another. Since it is a complex problem, it is about probabilities, and having the right mix of investments. It requires planning, forethought and potentially some adjustment along the way.
For most investors, this is very difficult to do alone. Just as there is a huge market for fitness classes, gym instructors and yoga teachers because most of us struggle to motivate ourselves to stay in shape, so it is important for investors to have guidance on their journey.
Knowing that you have someone who is keeping you pointed in the right direction, and to reassure you that you are still on track helps you to negotiate the times when things don’t feel so good. That is a vital part of travelling the long-term investment journey.
This won’t always be simple. It can’t always be reduced to binary choices. But we can still get clarity from knowing what the plan is, and how well we are meeting it.
Let us help you with your financial plan and your investment goals.
Provided by Vaal Triangle Insurance
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