When we decide to play a game, we understand that we have no control over the rules of the game.¹  But to be fun, the rules allow players control over a limited set of actions.  In chess, I’m allowed to decide which of my pieces to move in any given turn.  This is control.  But I can’t suddenly decide that pawns can move backward.  This is acceptance.

I’ve pointed out before that games imitate life.  There are certain things in life that we must learn to accept and certain things that we can try to control.  We can control our level of COVID exposure by avoiding crowded bars, but we have to accept the sad fact that we might contract COVID just by going to the grocery store.

Some people work hard to control as many aspects of their lives as possible.  Conversely, many forms of mindfulness, and most Buddhists, practice accepting that much of life is beyond our control.  Mindfully Investing is all about applying mindfulness principles to that small slice of life that touches on investing.  So, it would seem to follow that mindful investing is fundamentally about accepting a lack of control over our investing outcomes.  If that’s true, what place does control have in mindful investing?

Given we’re all playing in the same free-market game, with the same rules, is control or acceptance more important to investing success?

What Might We Control?

We can start by asking what aspects of investing might potentially be controllable to some extent.  And Sherlock Holmes would say that whatever aspects of investing that remain must logically be met with acceptance; they are the unavoidable rules of the investing game.

So, I looked back through past Mindfully Investing posts and found these major aspects of investing that might be within our control:

• Whether to invest – As savings become available, we can decide whether to invest them in potentially higher returning assets² (such as stocks and bonds) or spend those savings instead.
• Level of costs – While investing costs can’t be avoided entirely, we can choose options with relatively lower or higher costs.  The main costs of investing are transaction fees, fund fees, and adviser fees.
• Level of taxes on returns – Like costs, taxes can’t be avoided entirely, but they can be minimized.  The main sources of taxes on investment returns are capital gains, dividend/interest, and fund turnover.  The main ways to avoid some of those taxes are by using tax-advantaged accounts (such as certain retirement, education, and health savings accounts), tax-loss harvesting, avoiding short-term capital gains, and selecting funds or assets (like municipal bonds) with lower tax rates.
• Asset allocation (diversification) – We can decide what proportions of our investments should be in various kinds of assets such as stocks, bonds, real estate, gold, and other alternatives.  Because some assets may increase in value when others decline (or the rate of change may vary in the same direction), a portfolio containing an array of assets can often produce potentially better long-term returns and less severe drawdowns (risk).
• Level of return and risk – Usually the prospect of higher returns comes with the potential for higher risks of losses.  So, we can choose to gamble with higher return assets or play it safe with lower return assets.  And of course, there’s an entire spectrum of asset allocations from the extremely risky to the incredibly safe.
• Reinvesting and rebalancing – We can choose to reinvest dividends or use them for something else, which is really just a specific case of deciding whether to invest (the first bullet above).  We can also choose when and how to rebalance our asset allocations, which is a specific case of asset allocation.
• Address specific risks – Through the investing choices so far noted, we can emphasize or de-emphasize certain types of risk.  The most salient example is that we can address temporary risks, such as sequence-of-return risk, which crops up when we retire and are no longer earning new money to invest.
• Our reactions to market or life events – It’s often assumed that investors can’t avoid destructive cognitive biases and emotional reactions to market swings or unexpected life events.  However, the central thesis of Mindfully Investing is that by using mindful practices, we can limit the negative impacts of our emotions on our investments.  This includes related techniques such as building a written investing plan and committing to follow it.
• How long we invest – We obviously can’t choose to invest for 200 years.  But within a reasonable lifespan, we can choose to jump in and out of the market or buy and hold for the long-term, which I define as 10 years or more.  And history has shown that the longer you invest, the lower your chances of losing money.

What Must We Accept?

So, what parts of investing are left over?  The major aspects of investing that we must accept appear to include:

• • We must invest – Assuming you’re not set to inherit a bundle from a rich uncle, most of us need to invest to achieve goals like a comfortable retirement and funding our kids’ college education.  While we have the option to avoid investing entirely, that’s an obvious failure to address the future in any meaningful way.
  • You can’t decide when to start investing – I would have loved to start investing in 1988 because the stock market sky-rocketed for the next 12 years.  In fact, I had accumulated enough savings by 1999 to start seriously investing, after which the market went nowhere for 10 years.  Because you can’t choose when you were born, you have to accept the prevailing market conditions, whether they’re bull, bear, or something in between.  And you can’t pick when a windfall like an inheritance might occur.
  • Risk cannot be avoided – I noted above that we have some control over certain types of risks.  But there’s an old saying that risk cannot be destroyed, it can only be transformed.  Unfortunately, all investments have some potential for loss of principal, although these losses can manifest to varying degrees and in many different ways.
  • Rates of return are variable – The returns generated by all investments are unpredictable to some degree.  In fact, the average annual returns for stocks and bonds almost never happens in any given year.  Various assets have “expected” long-term returns but rarely offer “guaranteed” returns.  And temporary negative returns are possible for most assets.
  • Markets are unpredictable – Proponents of inefficient markets will want to tear their hair out over this one.  But regardless of whether markets are entirely efficient or not, for most individual investors, it’s impossible to predict the trajectory of the markets or individual stocks.  The corollary to this rule is that successful short-term market timing (such as attempts to “buy low and sell high”) is impossible.  Another corollary is that crashes (both big and small) are inevitable, but fortunately, history has shown them to be temporary aberrations.

• • Diversification is no guarantee of anything – Although diversification is supposed to be the only free lunch on Wall Street, there will be a lot of days when that lunch won’t be delivered at all.  I’ve investigated a wide array of diversification schemes including across assets, within assets, factor investing, geographic diversification, and others.  And in every case, we find that any superior performance of diversified portfolios over less diversified portfolios, either in terms of absolute returns or risk-adjusted returns, ebbs and flows over time.  Put another way, with a diversified portfolio, there will always be a worst-performing asset in your basket.
  • Greater potential returns mean greater risks – I noted above that returns are a function of risks, and we can choose where to invest along the return/risk spectrum.  But we have to accept that there’s no way to disconnect the link between returns and risks.  There’s no magic asset that provides relatively high returns and low risks.
  • You can’t beat the market – Again, this will irritate those seekers of alpha, but all evidence suggests that it’s impossible to consistently outperform a simple low-cost index fund.  We have to accept that we can only reap the easily obtainable market return.
  • Stock picking is a loser’s game – Because most stocks perform poorly over the long-term, picking a few “winner” stocks is an incredibly hard task.  While a lucky few may succeed by picking individual stocks, the vast majority of us individual investors will have much greater success by investing in low-cost index funds.
  • Inflation is part of the deal – Inflation (and it’s inverse cousin deflation) impacts the value of currencies, and the value of all investments are tracked in some form of currency.  The erosive effects of inflation impact all assets equally, even though those assets may grow at different nominal (non-inflation adjusted) rates.
  • Investing is emotional – I noted above that we can reduce our emotional reactions to market gyrations.  But the emotions themselves cannot be denied.  Your portfolio represents a lifetime of hard work, steadfastly saving for years, and accepting immediate hardships for the hope of future comforts.  We will inevitably feel bad when our portfolio value declines by 20% or 30% during a market crash.

You might have noticed that some aspects of investing have both controllable and uncontrollable components.  For example, we can’t avoid costs and taxes, but we can minimize them.  We can’t eliminate risk or emotions, but we can manage them.  And any crafty diversification scheme can be quickly subverted by uncontrollable market conditions.

Does It Matter?

Just because we might be able to control some aspects of investing, doesn’t prove that exercising more control will lead to better investing outcomes.  To prove (or disprove) that notion, I calculated how costs, taxes, reinvesting, rebalancing, reactions to market trends, and diversification would impact a portfolio over 35 years.  For this test, I assumed a constant rate of annual investment return of 6%, a savings rate of 10% per year, and a starting median income of $61,000 per year, which I increased by 3% per year to account for inflation.

For the “control case”, I further assumed that the investor had no financial advisor, low-cost index funds, no taxable events, quarterly reinvesting, annual rebalancing, no reactions to market trends (buy and hold), and a moderately diversified all-stock portfolio³.

For the “acceptance case”, I assumed one actively-managed large-cap fund, an advisor fee, higher fund costs and taxes, no reinvesting, no rebalancing, and a moderate behavioral gap caused by occasional panic selling and performance chasing.  (If you want more detail on my methods, please send me a message via my About page.)

I calculated the impacts of these contrasting factors both individually and cumulatively, and the results are shown in this graph.

The control case is shown by the left-most bar on the graph.  The bars to the right show the impact of failing to control for each individual factor listed at the bottom of the graph.  I placed them in order of increasing negative impact on the final account value after 35 years of investing.  The right-most bar, labeled “total acceptance”, combines the impacts of not controlling for any of these factors.  If no attention is paid to investing details, the resulting final account value is a paltry 39% of the control case’s final account value.  “Total acceptance” means losing out on more than $700,000 in potential returns!

Conclusion

When it comes to investing, controlling what we can is better than practicing total acceptance.  Because mindful investing is evidence-based, we can say that total acceptance is not a mindful way to invest.

This result seems to contradict the theme of acceptance central to the practice of mindfulness.  But instead, I see these results as a confirmation of the middle path followed by “engaged Buddhists”.  This style of Buddhism attempts to integrate a fundamental acceptance of suffering in life with actions that attempt to minimize suffering where possible.  Personally, I favor the engaged view of mindfulness, although I don’t consider myself a Buddhist or extraordinarily active in social causes.

The idea of engaged Buddhism confirms that it can be entirely mindful to make reasonable attempts to control our investing outcomes.  It’s wise to accept the iron rules of investing, but that doesn’t make us entirely powerless to improve our odds of investing success.

Conversely, consider a list of the worst investing mistakes: procrastinating on investing, trying to avoid risk entirely, over-optimistic future return expectations, assuming diversification is a cure-all, market timing, trying to beat the market, and panic selling when we feel bad.  All these mistakes involve trying to control things that we should instead accept as rules of the game.

The key to successful investing boils down to controlling the things we can and accepting the things that are beyond our control.  You can’t change the rules of investing, but you can play the game to win.

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1 – Cheaters who try to change or ignore the rules generally ruin the fun for everyone, with the possible exception of the cheater.

2 – In most of Mindfully Investing I address cash as one type of investment.  But for the purposes of this post, I’m going to say that keeping your savings in cash vehicles is essentially a decision not to invest.  That’s because cash is unlikely to fund most people’s long-term investing goals, particularly a comfortable retirement.

3 – Mindful investors prefer stock-focused portfolios, particularly with the very low yields provided by bonds right now, for reasons described more here.