Habits are the Key to Investing

Courtesy Jocelyn Kinghorn (https://creativecommons.org/licenses/by-sa/2.0/)

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For the lazy people….

• Investing is more than just money, it’s about your time, energy and personal growth
• Investing is often challenging because it involves continuous effort and impulse control
• Habits are a key tool to progress when faced with big goals and inconsistent feedback
• Habits also maintain key assets like health
• Habits provide security and minimizing risks
• A good resource on building habits is James Clear’s Atomic Habits

What is investing?

When one comes across the word “investing”, one usually thinks of money as the goal of investing, but it’s much more than just money*. The most important investment is yourself. Financial investing leads to more money but investing in yourself leads to more time, health, personal energy and yes, money.

Investing in yourself involves valuable resources like time, energy, youth and health. Your “personal” assets are often more valuable but less tangible than money like mental/physical health, social connectedness, a better romantic life, new skills, building a business or most importantly, building that death ray so you can ransom the UN for $1 million.

And the great thing is that anyone at any time can invest in themselves – it accessible to everyone at any age while financial investments involve a minimum amount of money.

However, regardless of whether investing is financial or personal, it is often a challenge. Take budgeting. It’s a critical habit to maintain proper spending and set aside money for investing and saving. It helps you track your expenses, ensure you live within your means and can properly plan for the future. Yet, a lot of people don’t budget.

I think people usually appreciate the importance of budgeting but find it difficult to put in a continual effort (kind of like going to the gym). So how do we maintain the effort to invest in ourselves and budget?

The keystone of success

With habits.

Let’s take a financial example – the goal of acquiring $1 million in your bank account. For most people, it’s impossible to earn $1 million quickly. It will take time to earn and save the money – it will also take will power to resist impulsively spending the money in the meantime.

Habits make this kind of task possible – you don’t need to think about it or use willpower – just an automatic behaviour that does what needs to be done regularly and consistently. And over time, like water, you wear down that seemingly impossible unsurmountable mountain of a goal. You get what you repeat…

When people look to accomplish things or improve themselves, they often focus on skills. I think that people focus on goals because they are tangible and flashy. We celebrate goals and accomplishments. We all go crazy and drool over Warren Buffet for his net worth and we lionize Tom Brady for his accomplishments on the field.

However, habits are the motor that moves you towards your goal. Would Warren Buffet had earned his fortune without his voracious reading habit? Would Tom Brady continue to excel on the football field like a Bladerunner replicant without his strict health and sleeping habits?

Goals stick out because they are the end and psychologically stand. However, the destination (goal) is not as critical as the motor (your habit). You can always adjust your destination (goal), but if your motor isn’t moving you (or at least in the direction you intend) you are not going to get to your destination no matter how many times you change or update the destination.

This even applies to goal planning. The most critical aspect of goal planning is the habit, not the actual goals planned. In the end, goals are approximations that are often changed, transmuted or abandoned (especially big goals). However, my habit of reviewing my goals weekly and setting triggers ensures continual action and progress. It’s become a thoughtless automatic process that instigates and directs my actions.

This is especially important for big long-term goals like retirement and climate change adaptation. The progress in big goals is often inconsistent and usually especially small at the start. It’s easy to get discouraged and give up in these situations. A habit helps you keep going.

It’s not just about what you gain with habits, but what you keep…

Habits are not just about new accomplishments and gains, but also maintaining what you have. Graham Stephan recently did an interesting video about the qualities of high net-worth individuals. One very interesting insight he noted is how an unexpectedly large amount of people will earn enough money to be in the top 1% of the US (11%) but very few people stay in the top 1% for 10 years (1.1%). It seems keeping money is equally important as acquiring money which seems to be borne out with the phenomenon bankrupt sports-stars and lottery winners. As a study on lottery-winners notes, large amounts of money do not avoid bankruptcies but merely postpone them. Regardless of the windfall, the money will eventually disappear without good financial habits.

Even if you don’t have money, you have invaluable assets that you need to maintain including health, lifeforce, energy and youth. Habits help you use these resources wisely and maintain them for as long as possible. The same thing applies to personal assets like health. For example, consider this hypothetical example.

Meet couch potato bob. He spends all his time in front of a screen, never works out, eats fast food exclusively and he has the pear-shaped body to prove it. Today is his lucky day. He will receive a wonder pill as part of a clinical trial. It will burn all his fat, strengthen muscles and turn him into a fitness model. This is a one-shot opportunity – once this drug is approved it will be too expensive for Bob to buy so he needs to adopt strict health, diet and exercise habits to maintain his new trim form. If he hasn’t already established these healthy habits before the received the pill, what is the chance he will develop them now and keep his new figure? Not good.

If you want to maintain what you have, you need to intentionally set up habits ahead of time so you do, especially if you are lucky to stumble into a windfall.

Habits provide security

Habits are important in maintaining a direction in life and minimizing risks. For example, habits minimize financial risks by providing control, independence and pitfalls.

There are many shady characters and institutions who want to manipulate into overspending yourself into crushing debt – some are even socially acceptable, like pay loan shops. Good habits like budgeting will stop you from overspending and then falling into their debt traps.

Even when financial advice is well-meaning, convention financial advice is sometimes inadequate. For instance, environmental issues are rarely discussed in conventional advice. And yet, the costs of environmental risk are rising significantly. Take advice on buying houses – climate-change-driven flooding is rarely discussed but many homeowners may see significant reductions in their house values in the near future due to increased flooding. In this case, a financial habit of regularly monitoring your property’s flood risk would provide advanced warning of any issues and more time to adapt.

How to develop habits

I think a key part of developing habits is having a system. I recommend James Clear’s Atomic Habits. He provides great insight into habits and provides a systematic approach to building good habits and removing bad habits.

I especially like his “two-minute” rule – the idea that when you start a new habit, make it very simple and easy to begin with so it takes less than “two-minutes”. For example, if you want to start running, instead of planning to run 30 minutes every day immediately, plan to put on your running shoes first thing in the morning and then build from there. It will be much easier to maintain the habit when it’s easy.

I would also add that it’s important to avoid moralizing any failures in your habit. I often struggled and blamed myself when a habit failed – if I failed the habit it was because my character was flawed, I didn’t want it enough, etc. instead of reviewing the habit. I think it’s important to accept oneself and if a habit doesn’t work focus on redesigning the habit, not blaming oneself.

Life is what happens to us while we are making other plans…

From a larger perspective, habits are useful because they work in a chaotic world. Life is rarely straightforward and our plans are often disrupted or waylaid. It’s easy to lose momentum and retreat into self-absorbed reflection when that happens.

Habits provide resilience so that you keep moving forward. As James Clear notes:

“True long-term thinking is goal-less thinking. It’s not about any single accomplishment. It is about the cycle of endless refinement and continuous improvement. Ultimately, it is your commitment to the process that will determine your progress.”

Footnotes

*Don’t get me wrong, financial assets are important to acquire with a thorough systematic review of the potential profit, costs and risks with the proper professional help. This is especially true for some assets that are generally assumed to be good investments such as formal education and real estate.