The Confidence Game

Finance 124

Nine essential tips to make you feel mentally stronger and more empowered about your finances

Here’s a question to ponder: where does confidence come from? Does it come from experience – what you’ve seen and been through, so that you know more or less what might happen this time around? Does it come from knowledge – ideas and concepts which you’ve researched and studied, facts and figures which you learned in school, that kind of thing? Or maybe it comes from intuition: a hard-to-describe “gut feel” that you can’t quite define, but which you know to be true.

Most experts would probably agree that it’s a little bit of all of the above. They’d also agree on one last thing: that wherever it comes from, for most people, confidence doesn’t come easily. Doesn’t really matter what field of endeavour you’re talking about – working at a job, raising a family, pursuing a hobby or pastime that you love, whatever – it usually takes a good deal of time and effort (along with a few mistakes made along the way) to feel as if you really know what you’re doing.

Needless to say, confidence is an incredibly valuable tool when it comes to managing your money. Having a degree of certainty and self-assurance about what you’re doing (or not doing) with your investments can make a tremendous difference to how you perceive financial challenges. It can also make a great deal of difference to how you choose to respond (or to not respond) to those challenges. The equation goes something like this: more confidence means more peace of mind. More peace of mind means better decision-making. Better decision-making means better performance, usually with a lot fewer hiccups and missteps. That’s a particularly valuable thing in times such as these, when months of extreme stock market volatility have made even the most experienced, most savvy investors question how much they really know, or how certain they can really be about anything.

Given all that’s happened with the stock market over the past several months (and, if we’re being totally honest, what might continue to happen for several more), it seems like a very good time to pass on some tips and hints on how you can strengthen your financial confidence. Some of the pointers listed below have to do with your perceptions and thoughts, while others are more practical “to dos,” that can help you minimize or even eliminate some of the common scenarios and actions which lead to financial anxiety and worry, and replace them with things that actually build confidence over time.

While not everything on this list will be of use to everyone at all times, taken together, this forms a powerful emotional foundation of resiliency and fortitude that you can draw upon whenever the going gets tough financially.

Focus on what you can control…

First things first: if you’re looking to gain more confidence about your finances, you need to understand what’s within your control and what’s not. And therein lies the core irony of managing our money: even though we spend a lot of time thinking about and planning how to manage our finances, at the end of the day, a lot of what we have to deal with remains outside of our control. The stock market, for example. Or interest rates. Inflation. The broader economy. Changes in tax law. Any one of these things may well keep us up at night, and erode the confidence that we may have in our financial situation. But when it comes right down to it, we have very limited ability to change any of them.

That said, we do have the power to change how we’re exposed to many of these issues. So, while we can’t control what the stock market is doing at the moment, we can absolutely control how much we’re exposed to the high-risk, high-return speculations which tend to suffer most in a downturn. We have no power over how inflation might eat away at our spending power – but we can try to control our spending, to limit the pain of higher prices. Short of running for prime minister, we can’t really change what the federal government might do to the tax laws in the years to come. But we can absolutely meet with a veteran accountant or tax lawyer and make sure that we’re saving the most we can on our taxes in the here and now.

Truth be told, most of the issues that are out of our control have these adjacent, or “next door” actions that are within our control. Focusing on these practical, tangible actions does require a bit of a mental shift in the way we think about money. But it can make a big difference to how confident we feel about things.

…while broadening your perspective on what you can’t

Now, this is not to say that we should simply ignore what’s outside of our control. Rather, what we need to do is to gain some perspective on these things. Doing so can actually strengthen our confidence about financial events, market moves and the overall economic environment.

The next time you’re feeling a little anxious about the stock market, interest rates, inflation, tax laws or any other financial or economic topic that’s a little too “big” for you to change, take a look at the past. Do a quick internet search on stock market fluctuations throughout history – how deep they go, how long they last and what happens when they’re over. How did investors deal with rising interest rates? How did consumers adapt to rising inflation? Try to remember.

No, learning more about financial history isn’t the most exciting thing to do (sure, we’d all rather be golfing, or enjoying time at the cottage, or visiting a foreign country, or meeting with family). But it can be a vitally important part of shifting your perspective on financial events – and helping you realize that whatever crisis du jour the world is going through, it too will pass. And that can have a powerful impact on your sense of financial confidence.

Know your comfort zone

Fact: every investor has a limit to the volatility and uncertainty which they can endure – after that, emotions take over and distort our financial decisions. For veteran investors and market watchers, the limit can be quite high: their portfolio could go down by 20% or more in a few weeks and they won’t lose any sleep at all. For newcomers, or those who aren’t as aware of stock market history, or those who don’t pay a lot of attention to market movements, a drop of even 5% in the value of their portfolios could make them anxious, worried and overwhelmed.

Knowing exactly where your comfort zone is (and making an effort to stay within it) can be a source of tremendous confidence – in the same way that an ounce of prevention is worth a pound of cure. If you can recognize that an investment lies outside of your comfort zone before you make it, you can avoid a confidence-busting mistake or misstep before it actually happens.

Most of us have at least an inkling about whether we’re a “conservative” or an “aggressive” investor, or something in between. But it can often take some time to really know the boundaries of your financial comfort zone. Sometimes, we have to learn the hard way, by overstepping those boundaries and realizing that a given investment causes us too much worry and anxiety only after we’ve committed money to it.

Get into the habit of doing a “gut check” on your comfort zone from time to time – most investors find that it will shift over time. For example, when you’re younger, you might not think too much about stock market losses – you’ve got time to make up for them. Once you reach your golden years, and you’re living largely on the proceeds of your portfolio, you might feel the need to play it more safely. For other people, it works exactly the opposite: you start out on the conservative side because you lack knowledge and experience. As you become older, you gain more investing experience and you find yourself more comfortable taking on risk.

Learn how to separate “big stuff” from “small stuff” (and try not to sweat the small stuff)

A timeless piece of advice that’s useful in all aspects of life – but particularly important when it comes to personal finance and investing. Instead of stressing out on the finer details of money management (and make no mistake, there are plenty of details to spend time on), most people will find their confidence grows when they take care of the “big picture” issues: broad portfolio allocation, having a long-term financial plan, building a legacy for the next generation, and so on.

Having trouble deciding what’s “big” and what’s “small”? Fair enough – when you’re feeling anxious and stressed about money matters, it can sometimes be difficult to determine which is which. Try asking yourself these simple questions:

Will I be worrying about this one year, five years, 10 years from now?

If it’s not a long-term concern, it’s very likely that it’s “small stuff.”

Does this affect my core financial goals or fundamental life values in any way?

If not, it almost certainly belongs in the “small stuff” category.

Are unrealistic expectations making me think that this issue is “bigger” than it really is?

Worried about things that are not within your control? Hoping for outcomes that are improbable, if not impossible? That’s a big flashing neon sign that you’re worried about small stuff.

Am I overthinking it?

Often, the small stuff “disguises” itself as much more complicated and complex than it really is.

Am I the best one to deal with it?

Is there someone whom you can hire to take away this anxiety? Someone you can delegate this task to so that you don’t have to worry about it? That’s a great way to get rid of the small stuff so that you can stay focused on the big picture.

Don’t get us wrong. If you’ve got the time and inclination to get into the minutiae of financial statements, market analysis and stock data points, by all means dive in – mastering the details can and often does make a positive impact on your portfolio returns. But let’s be honest: most of us have better things to do. If you’re like the vast majority of snowbirds, and have only a limited number of hours in the day (and limited space in your brain!) to devote to your portfolio, use the time wisely and keep the focus squarely on the stuff that matters most. If you can get the big stuff right, you’re likely to have taken care of 90% or more of the financial challenges that you will ever face. And that can be a tremendous confidence booster.

Boost your financial knowledge

They say that knowledge is power. True enough. It’s also confidence. The most basic fear of all is fear of the unknown: where is the market headed? Will rising interest rates impact my mortgage? Will I have enough money for my retirement? How can I leave enough for my kids and grandkids? The more you can eliminate these unknowns, the more peace of mind you’ll have about your finances…the less paralyzed you’ll be about what you should do… and the more confident you will be in your financial decisions.

If you’re feeling a distinct lack of confidence about your finances, one of the best things that you can do is to expand your financial knowledge. Read a book about investing strategies – there are certainly plenty of excellent ones to choose from. Tune into a stock market program once in awhile, and learn about the opportunities that others are uncovering during this time of market turmoil. Listen to a podcast, and find out how others are thinking about what signals to look out for which will tell you that the current bout of market volatility is coming to an end. Read a couple of online articles – or check out previous finance columns from your favourite snowbird magazine – and gain some investment perspective or timeless financial wisdom.

Of course, there’s a point at which the quest for knowledge becomes a burden – a point at which the sheer volume of stuff that you can read bogs you down, rather than building you up. This is an important point to keep in mind these days, in which you can literally read, watch or consume investment analysis, financial opinions and economic reports round the clock all year long if you really want to. So, start small. Instead of diving deep, do a little bit each day. You’d be surprised at how much more calm, confident and empowered you’ll be feeling in a short time.

Be comfortable with what you don’t know

A followup to the point above. Despite our best efforts to know more about what’s going on in the financial world (and why it may be going on), there will always be certain strategies, certain industries, certain markets and certain opportunities that we just don’t know about. Funny enough, being honest about what we don’t know can be as much of a boost to your confidence as our efforts to learn more about them.

Even the best investor in the world ─ Warren Buffett, chair of Berkshire Hathaway ─ is candid about the limits of what he knows. He calls it his “circle of competence” – the range of financial topics, issues, industries and strategies about which he has tangible, useful knowledge. He’s equally candid about the limits of that knowledge. Here’s what Buffett said about how important it is to understand that circle of competence in his 1996 letter to shareholders:

“What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”

Truly confident people are willing to acknowledge the limits of what they know. They understand that the ultimate goal of investing (and, we would argue, of life itself) is to build that circle of competence, expand it when you can, and “play” within the circle. That is ultimately the difference between wisdom and pride, between confidence and self-doubt.

So, by all means, read investment books. Pay attention to market news. Try to learn more about ideas and trends and perspectives that you may not already know. But be humble enough to know where the boundary of your circle of competence actually lies. Have the courage to know what you don’t know – that is perhaps the most profound expression of confidence possible.

Diversify to mitigate risk

Regular readers of this column have probably been waiting for this one – it’s a tip that we’ve mentioned many times before, in many different contexts. But it’s worth repeating here: diversification is probably the single most-effective portfolio protection strategy that there is. Something which you may not have thought about, however, is how diversification can also be a remarkably effective way to boost your financial confidence.

Remember the equation that we mentioned at the start of this article: confidence = peace of mind = better decision-making = better performance. You can see how diversification fits into this basic equation. When you have a lot of your wealth riding on a single investment (a large position in a single stock; a privately owned business; an investment property; a Picasso in the attic; whatever), it’s pretty hard to have peace of mind. What happens if that investment suddenly drops in value? What if you got your analysis or calculations wrong? What if unseen events or misfortunes throw your projections off? How can you ever have peace of mind about your financial circumstances when so much is riding on a single, large investment?

On the other hand, if you spread your wealth into different assets and different markets, as well as different investment styles or strategies (i.e., growth, value, momentum and so on), you can enjoy greater peace of mind about your overall financial situation. Sure, if you suffer a loss or sudden drop in value, it may well be a hard pill to swallow – it always is. But it won’t be a disaster. When you know that one bad decision or mistake won’t result in blowing up your entire portfolio or destroying your quality of life in retirement, you have peace of mind. And therein lies confidence.

Build your legacy

Legacy planning (or estate planning, if you prefer) is an easy thing to procrastinate about: when we’re young, we put it off because it seems so far away, and there are so many other financial matters to deal with first. In our later years, some of us get uncomfortable thinking about our ultimate demise, so we try not to think about it until we have to.

But the fact is, building our legacy is actually one significant way to build financial confidence. Giving our money “meaning” is a way for us to feel more in control of our life, and it can give us considerable peace of mind knowing that the people and causes which we care about will be provided for after we’re gone. Assigning a purpose to why we’re investing, figuring out what kind of impact we’d like to make now – and after we’re gone – can make a powerful contribution to how positive we feel about life, our money and everything else in the universe.

Whatever that legacy means to you – a flourishing family, a meaningful impact on a cause, or simply leaving the world a little better than when you came into it – invest the time now to build it. Figure out how you can make a meaningful financial contribution to the ones you love, and identify ways to do that. Identify an organization that’s doing work which matters to you, and make a contribution either with your time or your chequebook. Go write your will. Whatever you need to do, make a plan to get it done.

No, crossing all of these “to-dos” off of the list doesn’t give you the same kind of confidence that comes from having a seven-figure portfolio. But what it does give is ultimately a lot more meaningful: imagine the comfort you’ll feel when you know that no matter what happens in the stock market, the economy or the world at large, you’ve done your best to settle your affairs, clean up your messes and take care of your family, your friends and the causes which you care about in a significant way. Surely that’s the best kind of confidence there is, no?

Seek advice from others

Sometimes, it doesn’t matter what we do, what we know or what we tell ourselves – we’re just not sure about what’s going on, or what we should do about it. When those times occur (and they happen to even professional portfolio managers), successful investors know that it’s time to seek out advice and guidance from someone whom they trust.

For some people, that second opinion could come from a qualified professional – a wealth advisor, a financial planner, a stock broker or someone in a similar role. For others, it could be a person who’s financially knowledgeable, but not necessarily working in the investment industry ─ maybe an accountant, an entrepreneur friend or someone in the family with a good deal of investment savvy. Or perhaps it’s just a close friend who can confirm good ideas, challenge bad ones and identify biases, assumptions and “blind spots” that you might have a hard time seeing yourself.

Whoever that person may be for you, a second opinion can be a very valuable tool in developing your financial confidence. A second opinion provides a different perspective on the challenge you’re facing and that, in turn, can have a dramatic impact on the confidence which you feel going forward. Sure, if you end up working with a professional, you may end up paying more for their guidance and opinions than you would if you had just muddled through on your own. Even so, for a lot of snowbirds, the added confidence that comes from the reassurance that someone who really knows what they’re doing has taken a look at their financial situation, advised them about how to improve some areas and patted them on the back for doing a good job in other areas turns out to be well worth the money.

A final word about confidence…

It’s a funny thing, confidence. It’s tough to build – particularly during “interesting” times such as these. And it’s very easy to destroy. But the fact remains, confidence is as important to our long-term financial success as long-range planning, stock analysis, market strategy, or any of the many more “serious” financial topics and issues which we tend to read about in the newspaper, or see across our televisions and computer screens.

If you find yourself lacking financial confidence these days, don’t let it set you back. Developing confidence isn’t a “one and done” kind of activity. Rather, it’s a lifelong work in progress, one that requires an ongoing investment of time and effort.

Now that you think about it, you might realize that there’s a word for this kind of activity – one that takes a lot of up-front effort, but pays off in the long term. The word is investing. Which is only fitting, because investment in your own confidence is one of the best financial investments which you can make.

By James Dolan