Don't Lose Sight of What's Really Important

Last Updated Feb 3, 2011 3:12 PM EST

On this Thanksgiving, I wanted to focus on perhaps the greatest investing tragedy of them all: forgetting what's really important. It's best explained by the "Big Rocks" story from my book, Wise Investing Made Simple.

An expert in time management was speaking to a group of graduate business students. She produced a large mason jar and set it on the table. Then she brought out a box filled with big rocks. She removed the rocks from the box and began to carefully place them, one at a time, into the jar. When no more rocks would fit inside the jar, she asked the class, "Is this jar full?" Everyone yelled, "Yes."

She pulled out a bucket of gravel and dumped some into the jar. Pieces of gravel moved into the spaces between the big rocks. She continued this process until no more gravel could be placed into the jar. She asked again, "Is the jar full?" One student answered, "Probably not."

She then reached under the table, brought out a bucket of sand, and dumped the sand into the jar. The sand began to fill the spaces between the rocks and the gravel. She continued until no more sand could fit into the jar. Once again she asked, "Is this jar full?" Everyone shouted, "No!"

Finally, she filled the jar with water and asked, "What is the point of this demonstration?" An eager student said, "The point is that no matter how full your schedule is, you can always fit in one more meeting!"

Once the laughter had died down, the speaker replied, "That's not the point. This demonstration teaches us that if you don't put in the big rocks first, you'll never get them into the jar at all. What are the big rocks in your life? Time with your loved ones, your faith, your education, your dreams, your career, a worthy cause, teaching or mentoring others?" She concluded by repeating the important message: "Remember to put these big rocks in first, or you'll never get them in at all."

Individual investors following an active management strategy spend much of their precious leisure time watching the latest business news, studying the latest charts, reading financial trade publications and newsletters, and so on. What they're really doing is focusing on the gravel, the sand and the water, leaving insufficient time for their big rocks.

Investors who adopt a passive investment strategy ignore the "noise," (the sand, the gravel and the water). They're playing the winner's game and focusing on the big rocks, the really important things in their lives.

If you're engaged in active strategies or deciding between active and passive management, you should consider these two issues. First, why do you think you'll succeed when the majority of those doing the same thing, but with more resources and skills than you (big institutional investors), fail with great persistence?

Second, if you're lucky or skillful enough to generate alpha, is it worth the price you paid in its pursuit? One of the great benefits of believing in efficient markets is that it allows you to focus your attention on the big rocks in your life: your family, your health and your passions. That's why passive investing is the winner's game in life as well as investing.

Follow the series:
How to Avoid Financial Errors Don't Underperform Your Own Funds Don't Listen to Economic Forecasters Don't Lose Sight of What's Really Important The Greatest Beneficiary of a Passive Investment Strategy? Your Family
More on MoneyWatch:
Nouriel Roubini Talks, People Listen How to Build a Bond Portfolio With TIPS, Should You Buy, Hold or Sell? What Is the Investment Impact of Our Federal Deficit? Who's Smarter: Active or Passive Investors?
Hear Larry Swedroe discuss current investment trends and topics every Sunday at noon on 550 AM KTRS in St. Louis or streaming via the KTRS Web site. Can't catch the show? Download the podcast via www.investmentadvisornow.com or through the Buckingham Asset Management podcast page on iTunes.

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.