Small change

Know your limits

Take some advice from an 11th century king

You may know the story of King Canute and the tide. The king took his throne to the seaside and commanded the incoming tide not to wet his shoes and robes. Of course, as the tide rose it failed to respect his royalty and the waves crashed over his feet and legs. The king understood his limits and he did this to show his noblemen that he had no control over nature and that his power was empty and worthless against it.

Many investors fail to realise what King Canute knew all too well: the limits of his power. There are a number of aspects of investing that are easily managed but one major aspect that is completely beyond control. What’s worse is that many investors try to control the one thing they can’t. This is a mistake that comes with a cost.controlpoints

Success with investing involves learning to worry about the things that you can control and concentrating less on the things that are out of your control. It’s a mistake to spend a lot of time trying to affect your returns, which are generally a result of the thought and input you’ve put into the other four.

You should have given due consideration to the level of risk you’re able to take and whether it’s in keeping with your circumstances. Your choice of low-cost investments will keep your portfolio on track and not disadvantage your return each year. Your investment’s time horizon should reflect your goals and match with when you will need your money. Lastly, if you keep your emotions in check you’ll be able to stay calm when markets inevitably experience a downturn; you’ll be able to see through panicked headlines and short-term responses to events and know to sit tight and wait for markets recover rather than churning your investments unnecessarily. Many investors incur great costs — in tax, fees and, ultimately, portfolio performance — by failing to keep to their plan.

Returns are an outcome of, not an input into, an investment plan. Don’t make the mistake of trying to control your returns, particularly in the short term. If you find it hard to keep your emotions in check then a financial adviser’s most valuable service may be as your behavioural coach, helping you to stay calm and avoiding return-chasing or cashing-out at the wrong time.

Be like King Canute: understand your limitations.

Categories: Small change

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