By: Laura Walton AFC®
Why do successful people and organizations sometimes fail and what does that have to do with financial success? Greg McKeown, author of Essentialism: The Disciplined Pursuit of Less, discussed what drives us from success to failure in his Harvard Business Review blog. His concepts apply equally to our financial lives and suggest ways to stay successful.
I’ve inserted the word “financial” in McKeown’s blog: “clarity of purpose leads to [financial] success, [financial] success leads to more options and opportunities, increased options and opportunities lead to diffused efforts and diffused efforts undermine the clarity that led to our [financial] success in the first place.”
We see this behavior time and again. Individuals who start with clarity of purpose (saving for retirement), begin to feel their success (their goal is in sight), drift from their discipline of saving or decide to dabble in other financial options with which they aren’t particularly familiar (you fill in the blank) and jeopardize their original goal of a secure retirement.
McKeown offers three ways to avoid the path that leads from success to failure:
1) Use more extreme criteria: In financial terms, this means be very clear about your goal and the steps to achieve it. McKeown talks about the many “good opportunities” that might be available and the importance of identifying the best of those good opportunities. There are a lot of good financial opportunities but, if you take our Investing class, you’ll learn we believe that low-cost index funds are the best of the good opportunities available to achieve your retirement goals.
2) Ask what is essential and eliminate the rest: McKeown talks about conducting a life audit to rid yourself of nonessentials. We often see that clients have accumulated numerous investments. They might include old 401k’s, life insurance policies, annuities, etc. that each had a place in their lives at one time. By conducting a financial audit (think closet cleaning), many accounts can be consolidated. The result is a much simpler financial picture which makes it easier to understand and track. A plan that is easier to understand and track encourages the client to stay on course.
3) Beware of the endowment effect: This is an interesting concept. McKeown talks about “divestiture aversion”, the idea that once you own something you’re loath to give it up whether or not it’s in your best interest. In financial terms, this means you might hesitate to sell a stock or fund even though it no longer supports your goal. McKeown suggests that instead of asking “How much do I value this item?” ask “How much would I pay to buy it today?”
Greg McKeown concludes by saying that success leads to failure because it leads to the “undisciplined pursuit of more” and, as financial professionals, we see the “undisciplined pursuit of more” is often at the heart of financial failure.