What’s your motivation when it comes to investing? <\/p>\n\n\n\n
This is a trick question. <\/p>\n\n\n\n
Most financial planning misses this point, but nobody has just one motivation when it comes to investing. <\/strong>In fact, you’re likely to have three:<\/p>\n\n\n\n In other words…would you like to improve your lifestyle? Sure! But would you be willing to go all-out for Improvement even if it came with a significant risk of going broke? Probably not.<\/p>\n\n\n\n On the other hand, would you like to maintain your current lifestyle while taking it a bit easier? Of course you would. But to achieve that, would you give up any prospect of significantly improving your life from where it is now? Again, probably not (I\u2019m sure you know someone who lives very cautiously but still sometimes buys lottery tickets).<\/p>\n\n\n\n It\u2019s a balance: every investor has at least some of each motivation, but they\u2019ll assign a different level of importance to each.<\/em><\/p>\n\n\n\n The logical consequence of this?<\/p>\n\n\n\n You can only decide what assets to invest in once you’ve decided on which motivations you want to serve and in what proportions.<\/strong><\/p>\n\n\n\n Let’s take each in turn:<\/p>\n\n\n\n You don’t want to end up having to drastically cut back if you lose your job, if you get ill, or if the economy takes an unprecedented dive. In short, you don’t want your financial life to be fragile<\/strong>: you want to put a bit of bubble wrap around it, so you can take some knocks throughout the journey.<\/p>\n\n\n\n Nobody wants to be worse off, regardless of their starting point. For one person, a setback might mean a risk of ending up on a friend\u2019s sofa \u2013 for another, it might mean yanking the kids out of private school. One is objectively worse than the other, but both are psychologically painful: everyone wants to avoid their lifestyle getting worse, even if they\u2019re starting from a privileged point.<\/p>\n\n\n\n This motivation is all about safety<\/strong>, and downside protection. You’re not expecting the assets you select to address this motivation to rise in value: you just want them to be available to you if you need them, regardless of what\u2019s going on in the wider economy.<\/p>\n\n\n\n Assets in this bucket would include:<\/p>\n\n\n\n On top of avoiding disaster, we’d all like to be able to achieve the same lifestyle we have now while taking it a bit easier \u2013 whether that\u2019s earning some \u201cpassive income\u201d so we can cut back on working hours without reducing spending, or building up assets for the future so we can still enjoy our current lifestyle after we\u2019ve stopped working completely.<\/p>\n\n\n\n Investments suited to serving this motivation are those that \u2013 on average \u2013 grow by a respectable amount more than inflation every year.<\/p>\n\n\n\n These could include:<\/p>\n\n\n\n These investments involve taking on more risk than those geared for Protection (the stock market might crash, for example), but over a long enough time period you’d expect them to make you a bit better off every year. They won’t see you suddenly become the richest person in the world, but they’ll help to maintain your position relative to everyone else, even when you retire or take a step back from work.<\/p>\n\n\n\n These two motivations combined \u2013 protection and maintenance \u2013 are what traditional investment portfolios are built around. The idea is that you insulate yourself against disaster and get a bit better off every year, so at some point you can start living off your investment income rather than your earned income.<\/p>\n\n\n\n These are worthy aims, and I can\u2019t imagine anyone who wouldn\u2019t want to achieve both. But there\u2019s a third motivation that typical advice tends to ignore\u2026<\/p>\n\n\n\n Let’s be honest: there’s at least part of you that would like to be significantly better off. <\/p>\n\n\n\n You wouldn’t just maintain your lifestyle: you’d be able to move to a bigger house in a nicer area, take more holidays, buy fancier stuff…and just as importantly (admit it), you’d now be wealthier relative to your friends and acquaintances.<\/p>\n\n\n\n Traditional investment models tend to pretend this motivation doesn\u2019t exist, because achieving it involves taking outsized risks and putting in outsized effort. As such, it\u2019s difficult to give one-size-fits-all advice \u2013 all reassuringly back-tested to show how that strategy would have performed over different periods in the past.<\/p>\n\n\n\n Assets in this bucket might include:<\/p>\n\n\n\n These are assets that can go very right or very wrong. Some will do both: they\u2019ll have a couple of dreadful years followed by an incredible one. That\u2019s why you can\u2019t rely on these investments to protect you: you need to know what you signed up for, and be willing to deal with some swings in your fortunes before your financial position is eventually improved.<\/p>\n\n\n\n It’s understandable that this motivation is ignored, but it\u2019s a problem \u2013 because the psychological need for improvement isn\u2019t being met. As a result, people will nod along politely as their financial adviser talks about the benefits of a diversified portfolio that grows slightly above inflation for a long period of time… then go out and buy a house to flip for a quick profit.<\/p>\n\n\n\nEach asset you buy is suited to serving one \u2013 and only one \u2013 of these motivations. <\/h2>\n\n\n\n
Motivation #1: Protect your lifestyle<\/h3>\n\n\n\n
Motivation #2: Maintain your lifestyle<\/h3>\n\n\n\n
Motivation #3: Improve your lifestyle<\/h3>\n\n\n\n
How should you weigh each motivation?<\/h2>\n\n\n\n