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What to worry about when investing

(MoneyWatch) The market volatility we've experienced recently reminded me of an interview I did a few months ago with Bob Seawright, whose his blog is titled "Above the Market." He asked me a simple question: What should we be worried about? Even after what we've experienced lately, my answer hasn't changed a bit.

When Seawright asked me that question, we had been experiencing a bull market for the past few years. Still, there was no shortage of things for investors to be concerned about: There was the sluggish recovery from the financial crisis, the possibility of significant municipal bond defaults, the impact of ObamaCare and so on. Despite the litany of bad news, my short answer to his simple question was this: "You should be worried about outliving your assets so that you cannot live at a standard high enough to make you happy. The problem with these types of questions is that it's the unknown unknowns that often cause the problems rather than the known unknowns."

Given the importance of the question then and now, I thought I would expand on my answer. There will always be many things for investors to worry about. Right now, it may be continuing volatility. However, it's not productive to worry about the things you can't control. Instead of worrying about them, you should focus your attention on the things you actually can control, such as these:

  • The amount of risk you take, making sure that you don't take more risk than you have the ability, willingness and need to take
  • Diversifying the risks you take as much as possible, minimizing or avoiding risks that don't give you higher expected returns
  • Keeping investment costs low
  • Keeping tax efficiency high

What many investors fail to understand is that factors such as the amount you spend, the date of your retirement and the age you access Social Security benefits can have more impact on the success of your financial plan than beating the market by using active management strategies. Not only is focusing on the things you can control far more productive, but it will also allow you to enjoy your life more, and that in and of itself is a worthy objective.

As I point out in my book "Think, Act, and Invest Like Warren Buffett," the Oracle of Omaha pays no attention to macroeconomic or market forecasts and advises that you should pay no attention to them either. While you can't invest exactly like Buffett, you certainly can follow his investment advice. Doing the contrary would seem rather foolish.

One final bit of advice: Because economic and financial crises occur with great frequency and there's no guarantee that they will be solved in a reasonable time frame, your financial plan should incorporate the virtual certainty that crises will occur. And to prevent or minimize the risk of your plan's failing, it should have a backup plan or options that can be exercised so that the plan doesn't fail (such as lowering spending or working longer).

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