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11 July 2011
The second president of the United States, John Adams, made a prediction years ago in a letter to his wife:
“The second day of July, 1776, will be the most memorable epoch in the history of America. I am apt to believe that it will be celebrated by succeeding generations as the great anniversary festival…It ought to be solemnized with pomp and parade, with shows, games, sports, guns, bonfires and illuminations, from one end of this continent to the other, from this time forward forever more.”
Make no mistake about it, John Adams painted an incredibly accurate picture of what was to come! This past month, a mere 235 years later, our nation celebrated its great anniversary festival by hosting parties, parades and fireworks with our neighbors, family and friends.
But depending on your viewpoint, one could also argue that John Adams was wrong. After all, we celebrate our nation’s independence on the fourth of July, not the second!
In hindsight, it seems ridiculous to claim that Adams was wrong. In the moment, however, it is easy to get distracted by details that have little relevance to our financial well-being. We easily become critical of ourselves and envious of others, resulting in us completely missing the big picture.
In our personal financial lives, this dynamic manifests itself in a wide variety of ways, but is typically a function of focusing too much on short-term results. Your neighbor got a 4.0% rate on their mortgage while you refinanced at 4.25%. Your brother-in-law bought Apple stock 6 years ago as you maintained a balanced portfolio. And your friend saved 15% on her car insurance.
On the surface, it may seem like you are doing something wrong, missing out, or getting bad advice. The big picture may paint a very different picture. Your neighbor is planning on staying in their home forever and was willing to incur higher closing costs to obtain that rate, while you are planning on moving within 5 years. Your brother-in-law also bought a handful of other stocks that didn’t fare so well (and neglects to mention that when bragging about Apple). And your friend elected to reduce her liability limits to obtain the lower rate.
Proper financial planning revolves around all areas of your financial life working in tandem to support the life you want to live. If you take on additional risk (whether it is in your portfolio, borrowing more money, or the result of reducing liability limits) as a result of focusing too heavily on the short-term, you jeopardize all of the things you have accomplished to date.
People frequently confuse precision with accuracy in their financial lives. They believe that the more precise they can get with calculations, the more details they can uncover, and emphasizing cost rather than value is the key to financial success. However, looking back years from now, you will recognize that all along, you would have been far better off maintaining a focus on being approximately right, than risking that you could be precisely wrong.
This article was first published on the Financial Planning Association's All Things Financial Planning blog.
Intelligent Decisions. Simplification. Peace of Mind.
