Strong personal economy weathers the waves
Have you ever noticed that the news is always full of some drama or ’nother? The stock market is skyrocketing. The stock market is diving. The credit world is in meltdown. Savings are in the tank. Inflation is zooming up. The economy could be suffering from stagflation.
People are swayed by the news. It creates stress and tension. Even the investment world is always responding, although those folks should know better.
In the book Why Smart People Make Big Money Mistakes and How to Correct Them, Gary Belsky and Thomas Gilovich cite a Harvard study of investment habits:
“Investors who received no news performed better than those who received a constant stream of information, good or bad. In fact, among investors who were trading (a volatile stock), those who remained in the dark earned more than twice as much money as those whose trades were influenced by the media.”
Their point is that investment decisions should not be made based on the market’s most recent gyrations, but on your financial goals and the investment strategy that will achieve them.
Really, we needed a study for this piece of common sense? And yet it is common sense that is ignored every day.
There will always be something going on in the news. And the global economy will always be changing. That’s life. But do those changes always impact your life? Let’s face it, if the whole world is on a high and you’ve just lost your job, can’t make your payments on time or have just had to leave work because of an illness, all that good news means squat to you. And if the whole world is ready to jump off a bridge and you’ve got all your ducks in a row, you’ll be fine.
Without a strong financial foundation, economic woes are likely to have a bigger impact on you than you’d like. But if your personal econ- omy is strong, you’ll have a plan, the resources and the flexibility to make it through the rough patches.
Focusing on your personal economy means putting the pieces into place that will protect you and give you financial room to manoeuvre. Having clear financial goals helps.
The global economy is real and can have an impact on your personal economy. Just ask all the folks who have lost jobs, taken pay cuts or had their work hours cut back. But if you allow the negative information that flows around you to drive your behaviour, you will not be happy. (You do value “happy” as part of your personal economy, right?)
Want to make your personal economy strong?
Don’t spend more money than you make. Save something. Get your debt paid off. Mitigate your risks with an emergency fund and enough of the right kind of insurance.
As for the rest, it’s good to know what’s going on. It’s better not to have to care because you’ve built a personal economy that can weather the storm. Gail Vaz-Oxlade writes every Tuesday for Smart Money.