Albert Einstein once said, “The most important decision we make is whether we believe we live in a friendly or hostile universe.” It’s an important question because our answer determines how we frame the world around us – including how we view our own financial picture. If we think the world is out to get us it essentially means turning ourselves over to fear and suspicion and turning our lives into one endless string of fearful events after another. Alternatively, if we think the world is a place of imperfect souls looking for genuine connection and mutual benefit, we open up a world of freedom and opportunity. Even though no one would have any trouble justifying a pessimistic world view, we could just as easily make a strong case for the opposite. This being the case it probably makes more sense to treat the universe as a friendly place – including the financial universe. When it comes to our own financial universe we each have a choice between a positive and empowered point of view and a negative and fearful one. Assuming we prefer less fear to more fear when it comes to our finances, the question then becomes how to properly frame the world to conquer our fear.
The first step is to remove the chaos and mystery from our economic world view and frame things in a more reasonable and manageable way. For example, just like pretty much everything else in the universe, the world economy and the capital markets are cyclical. They continuously fluctuate between periods of greed and fear. This is what the economy and markets are all about; expansion and contraction, overconfidence and pessimism. Whatever mysteries the capital markets hold, for the most part, we do understand their cyclical nature.
Once we understand this, we each get to decide the extent to which our corner of the universe is affected by wherever we’re at in the economic cycle and the degree to which we care. For the most part, the best policy is not to know and not to care – at least not too much. We can hire somebody to watch those things for us unless we find them inherently interesting. The fact is hard work and talent will always be in demand at all times whether we work for ourselves or for someone else. So in the big scheme of things, our own personal work ethic – which we have direct control over – will always have a stronger bearing on our lives than the economy, which we have no control over.
We can view the stock market in the same way. The market also fluctuates back and forth between cycles of greed and fear, but over the long-term it has produced an average compounded rate of return of about 9.5%. If we gain just one insight from this little piece of information, it should be that we really can’t expect the market to do much more for us than that. Once that’s settled, we can get on with our lives without chasing unrealistic expectations or worrying about whether or not we’re missing out on the next hot stock tip. By the way, long-term government bonds have historically yielded about 5.5% so we don’t have to worry about what to expect from them either.
The goal is to frame our understanding of the financial world in broad terms and accept the fact that we only control our own little piece of it. This takes some of the mystery and fear out of our daily lives as we focus on the things we can control, like our own work ethic and ingenuity, rather than the things we can’t. It also provides a context within which we simplify the world by letting go of unnecessary complexity and noise. Like Einstein said, “Any fool can make things bigger, more complex… It takes a touch of genius – and a lot of courage – to move in the opposite direction.”