Between a global pandemic, civil unrest across the nation, and probably the most controversial presidential election of our lifetimes, it’s almost never been more normal to feel like you're not in control of your situation. While there will always be a mountain of variable out of our control that will affect us on a daily basis, our perspective on control will often be the deciding factor in our level of happiness. I once heard this described as having an Internal or an External Locus of Control (LoC). Our LoC isn’t a hardwired trait or psychological attribute, but simply a perspective that can vary through time or in different domains. A person with an internal LoC believes they will ultimately decide their own fate, success, happiness, etc. Someone with an external LoC believes the opposite, they believe that they are subject to the whims of their environment, the economy, the political landscape, etc. Often, our perspectives will change from time to time and in different areas of our life. For example, we may have an internal LoC with regards to our career, but an external LoC with regards to our finances.
It’s probably easy to surmise which of the two I generally believe is the right perspective to take. However, I don’t want to invalidate the idea of an external LoC, and how easy it can be to fall into that mindset. We often notice copious amounts of people who are in much better environments, financial positions, circumstances, etc. (especially via social media), often to no fault of our own (or theirs for that matter). In fact, believing it was external circumstances rather than their works that lead them to their fortune is an easier, more natural reaction. That said, there is strength in talking an internal LoC approach to life is that it will motivate you to try to better your situation. If we throw our hands up in the air and see ourselves as exclusively subject to our environment, where would the hope be? While our external environment does have a strong impact on our happiness, believing that we can overcome our circumstances is incredibly empowering. So, how does this apply to our personal finances?
From a behavioral standpoint, this is as applicable to finance as any other topic we’ve covered. I can’t count the number of times I’ve heard something along the lines of, “why would I invest when I have no control over the performance of my investments anyway?” While it’s true that the behavior of our investments, in the end, is subject to a significant amount of risk, we can educate ourselves and do a lot to “tilt the odds” in our favor. Imagine a casino where instead of the house winning over 50% of the time, we could win the majority of the time. That is where we find ourselves in long-term investing, while nothing is guaranteed but, with a well-balanced, diversified, low-cost portfolio, there’s a very strong chance that after a 10-40 year time period we’ll come out the other side with significantly more that we put into it.
When we have an external LoC perspective with respect or our finances, it’s incredibly difficult to motivate ourselves to act. And yet, with an internal LoC perspective we’re eager to do everything within our power and then see where the chips fall. It may be that due to our circumstance things don’t turn out as well as we would have liked, but we’ll still be immensely better off than if we didn’t try at all.
Eric Olsen, Principal
Olsen Family Financial, LLC