To Win at Investing, You Have to Give Up Control

Let's face it. The smarter you are (or think you are), the more likely you are to believe that investment outcomes are within your control. This is a financial paradox. To win at investing, you have to give up the illusion of control. This can be very bitter medicine for individuals who by job or training are used to being "in control".

I have a friend, a very successful businessman that provides a good example. Every now and then, when the stock market is being temperamental, he will give me a call and ask what I think. He knows our evidence based philosophy (built on planning; based on evidence), but is always hoping that there might be some angle, some edge that I can convey. He likes to exert control over his investments and his expectations are that they will perform precisely as he has planned.

Behavioral psychologists might call this 'Control Bias', underestimating risks where we are in control (or at least have the illusion of control) and overestimating risks where we cede control. Think about stepping into an elevator and compulsively pressing the "close" button until viola, the elevator door closes. Did the door actually close because of your action or was it going to close anyway? The control person thinks that they made it close.

Brain science tells us that we make projections about future events mostly with our prefrontal cortex, a part of the brain that is rational. As soon as fear comes into the picture, (think, market down 20%), another part of the brain, the amygdala and other components of the limbic system takes over. This part of the brain is emotionally focused.

Otherwise smart people think that they can "out-think" the amygdala but they can't. They seek a coherent narrative that reflects the direct control that they have on investment outcomes. When events happen in the financial markets that were not within the realm of their plans, they often find it difficult to revise their narrative...after all, they are smart and the universe should be ordered as they expect.

We have a financial planning tool we use with clients called The Personal Wealth Benchmark™. This tool is designed to stress that "inputs determine outcomes". The primary inputs are your savings rate; investment allocations; time; and behavior. We refer to these inputs in our planning reviews to assess if the client is on path towards their long term planning goals. If the client needs to save $40,000 per year and instead has been saving $10,000...well the outcomes are necessarily going to be impacted. There is no magic.

Years ago we were working with a client nearing retirement. He came to the office for a planning meeting one day and we had included an updated Investment Policy Statement in his meeting materials. My staff greeted him and sat him in our conference room. When I walked into the room a couple minutes later, he had already rifled through the Investment Policy Statement and scratched though the long term expected return for his portfolio allocations, changing the 7% to 10%. Being the smart, control oriented person that he was, he said "I changed the expected return...because I need the higher (10%) figure." To him, if we simply exerted enough direct control over the investment variables, the returns would surely comply.

The more reliable path towards your financial planning goals is to accept and use the power of the financial markets instead of fighting them. You can control the inputs described above (savings; allocations; time; and behavior). You can't control The Fed; China; Oil Prices; Taxes; Inflation and on and on. The choice is yours, stay "in control" or cede control in exchange for better long term outcomes.

To learn more about James Wilson, view his Paladin Registry research report.

Previously posted on

About the Author: James Wilson is a Certified Financial Planner™ and founder of J.E. Wilson Advisors. His firm is South Carolina's first comprehensive fee-only financial planning firm, established in 1982. He's passionate about helping his clients achieve what they want financially and has been doing so for over 30 years. He has authored several educational white papers , blogs and podcasts that can be found at and Follow James on Twitter @jwilsonsc