Financial Advisors

Focusing on the Controllable: How To Worry About The Right Things In Your Fiscal Life

We all have a lot to worry about these days.  From political turmoil and the threat of war to more mundane concerns like getting our taxes done and saving for retirement, most of us have no shortage of issues to raise our blood pressure.  It can be downright paralyzing to think of all the potential issues and concerns we all face each day.  It is with that in mind that I propose taking a step back and doing what Stephen Covey told us to do in his book The 7 Habits of Highly Effective People: focus on what you can control.

In 1989, Stephen Covey authored one of the most widely-read and influential leadership books in history, selling more than 25 million copies in 38 languages.  In The 7 Habits, Covey emphasizes the importance of proactively addressing worrisome problems.  However, he also notes that to be effective in doing so, we must first determine whether we actually have any control over the concern in question.  This is where Covey introduces the idea of the Circle of Concern and the Circle of Influence:

This concept helps us categorize our concerns in such a way that we can focus our time and energy only on those issues over which we have some amount of control.

Applying Covey’s Circles to Personal Finance

For most of us, few areas of life cause more stress than our finances.  It’s also an area of life where applying Covey’s circles can result in major improvements in quality of life.

Below are some specific personal finance concerns which are within your circle of influence:

  • Spending, working, and saving

The decisions you make regarding how much you spend, how much you save, and how long you work are probably the most important financial decisions you’ll ever make, and they are entirely within your control.  For example, establishing a budget and sticking to it in order to save consistently is likely to have a far greater impact on your financial health than anything that happens in the financial markets.

If you’re retired, you should make great efforts to spend less than 3% of your portfolio each year in order to reduce the probability of running out of money. If you’re still working, you should be trying to save as much money as possible each year so that staying below the 3% threshold in retirement will be easier to achieve.  And you should work as long as you can, as a shorter retirement allows for greater spending freedom during retirement, as does additional income from part-time work in retirement.

  • Behaviorally-biased investment decisions

Behavioral biases can have a detrimental impact on investment results (I’ve written about several of these biases here, here, here, here, and here); thus it’s crucial to be aware of biases that may impact your financial goals. When you invest, it is imperative that you truly understand your own risk tolerance so that you can invest accordingly and stick to your strategy when markets get rough.  One of the worst financial decisions you can make is to sell your stocks in the middle of a market panic because you fell victim to your own behavioral biases.  Avoiding poor behaviorally-biased investment decisions is largely within your circle of influence.

The two concerns discussed above are areas over which we have a great deal of control, and they also can have dramatic impacts on our long-term financial health.  However, many of the concerns that cause investors the most stress are actually things over which they have little or no control.  Below are some common examples.

  • Adverse life events

Life happens, and some unpredictable life events can have detrimental financial impacts.  These might include the following:

  • Losing a well-paying job.
  • Becoming unexpectedly sick or disabled or caring for a loved one who becomes sick or disabled.
  • Experiencing significant property damage due to flood, fire, or natural disaster.
  • Falling into an expensive legal dispute.

These events are unfortunate and can derail your ability to meet your long-term financial goals.  However, they are largely outside of your control.  Instead of worrying about the possibility of one or more of these events occurring, I encourage you to seek appropriate insurance coverage to mitigate the effects of such events. Life insurance, health insurance, disability insurance, homeowner’s insurance, umbrella insurance, and long-term care insurance may all help to minimize the impacts that an adverse life event could have on your finances, and obtaining proper coverage is entirely within your control.

  • Financial market risk

Markets rise and fall.  The prices that Mr. Market will assign to your financial assets in the future are impossible to predict.  With asset valuations stubbornly high in the face of deteriorating fundamentals, financial market risk is currently above average in my opinion.  However, I don’t control the markets, and neither do you.

Despite the best efforts of investors to invest prudently, markets will inevitably gyrate as they’ve done throughout history, and there’s nothing you or I can do about it!

Given the inevitability of market volatility, the best course of action is simply to ensure that your exposure to risky assets remains in tune with your risk tolerance.  Given that markets are currently richly valued, now is a good time to make any necessary adjustments.

  • Political risk

Somewhat ironically, Covey mentioned national debt as an area of concern when he published The 7 Habits nearly 30 years ago.  At the time, the level of national debt relative to GDP was less than half what it is today.  Add in the rise of nationalism, political polarization, and trade wars, and it would seem that the political and geopolitical risks that investors face today are historically high.

Policy and geopolitics can affect the value of the dollar, income taxes, or the value of your home.  These risks are worrisome, but they are outside the circle of influence for most people. However, we can control how we utilize tax-advantaged investment vehicles, such as 401(k)s and IRAs, in order to mitigate some of these risks.  You may also want to tweak your investment strategy to avoid or capitalize on certain geopolitical risks.

I have obviously not addressed every financial concern a person might face; there are plenty of others.  However, in all cases, the Covey framework is useful in determining where we should focus our time and energy.  Rather than worry about things over which we have no control, we can help to firm up our financial footing and live more stress-free lives by proactively addressing those concerns which we can influence and then letting the chips fall where they may.

This information is prepared for informational purposes only and does not constitute investment or other professional advice. The comments should not be construed as a recommendation of individual holdings or market sectors. There are no assurances that any predicted results will actually occur.  The views expressed are those of the author as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions.

The views are those of Matthew Blume as of the date of publication and are subject to change and to the disclaimers of Pekin Hardy Strauss Wealth Management.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Matthew Blume, CFA

Matthew is a portfolio manager of private client accounts at Pekin Hardy Strauss Wealth Management, and he also manages the firm's ESG research and shareholder advocacy efforts. He earned a B.S. in Electrical Engineering from Valparaiso University and an MBA from Northwestern University's Kellogg School of Management. Matthew is a CFA Charterholder.

Read Matthew's Bio