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Why I'm Done With Financial Goals

By Morgan Housel - Apr 17, 2014 at 12:00AM

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Maybe you should be, too.


I have lots of financial goals. I always assumed responsible people had them. Save this much, retire by this date, and so on.

But I'm beginning to wonder if goals are overrated. Smart people have argued that they can actually do more harm than good.

In place of goals, a lot of successful people have systems. What's the difference? A goal is a target with an end date. A system is a way of doing things all the time. Scott Adams, the genius behind the Dilbert comic, writes in his book How to Fail at Almost Everything and Still Win:

A system is something you do on a regular basis that increases your odds of happiness in the long run. If you do something every day, it's a system. If you're waiting to achieve it someday in the future, it's a goal.

He gives a few examples:

The system-versus-goals model can be applied to most human endeavors. In the world of dieting, losing twenty pounds is a goal, but eating right is a system. In the exercise realm, running a marathon in under four hours is a goal, but exercising daily is a system. In business, making a million dollars is a goal, but being a serial entrepreneur is a system.

I'd add to this list:

  • Graduating college is a goal, but learning throughout your entire life is a system.
  • Having enough money to retire is a goal, but working in a job you love so much you never want to retire is a system.
  • Beating the market is a goal, but investing in good companies for as long as you can is a system.

Goals can be dangerous because they tempt you to do crazy things to achieve them on time. If your goal is to increase your net worth by 20% in the next year, you might put all your money into the riskiest stock you know and hope for the best, thinking it's the only way to meet your goal in time. That might work. Or it could blow up in your face. Saving each month and investing for the long haul is a better bet. And that's not a goal. It's a system.

We also have to come to terms with the fact that the world neither knows nor cares about our goals. You might have a goal to save $10,000 over the next year, but life could drop a pink slip on your desk next month, and there's nothing you can do about it. You might have a goal to retire in ten years, but life will throw in a bear market nine years from now and even give not a damn. Everything important in finance is random and unpredictable. Goals assume that randomness goes away, and that things will work out on a schedule of your choosing, which they rarely do. As the saying goes, "You plan, God laughs."

Goals also fall victim to arbitrary dates. Yale economist Robert Shiller once noted the absurdity of companies racing to meet one-year earnings targets. "I don't know why people keep using one year earnings," he said. "That is the time it takes the Earth to go around the sun. I don't see any other significance." It's insane to think that a household, business, or government budget is most efficient when squeezed into the time it takes for the Earth to go around the sun. But it's how most budgets are done.

What you want is a system that allows you to be happy and successful, rather than goals that guide your system. For investors, a smart system probably includes:

  • Saving as much as you can while remaining happy from each paycheck, consistently throughout your life.
  • If not dollar-cost averaging, then waiting until attractive investments arise, however long that takes.
  • Having enough cash to handle a job loss or market crash.

And it means avoiding:

  • Price targets.
  • Annual return assumptions.
  • Time-specific goals.

Doing this will probably make you a better investor and lead to less stress -- which is actually a pretty good goal.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

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