Last Updated on December 2, 2024
Overview – What Are We Able to Change?
In virtually every situation we face we know that, implicitly or explicitly, there are only so many variables we can realistically control.
From something as simple as the price of staple foods to something as complex as the volatility experienced by financial markets on an intermittent basis, there are an abundance of factors that affect us yet we cannot possibly hope to influence.
What, then, are we supposed to do in the face of such a reality? Instead of worrying about all the things beyond our control, we’re better off having a clear understanding of what we can control and staying firmly within it. Put another way, we need to have a clear understanding of our locus of control.
Investing is no different when it comes to the kinds of variables that can and cannot be controlled, yet some investors continue to forget this reality, leading to all kinds of troubles and needless worrying.
By delineating their locus of control, investors can better direct their efforts towards variables that can be changed instead of stressing over things that won’t.
What Is a “Locus of Control” Anyways?
Do you ever feel at ease whenever you’re granted the opportunity to choose? Whether it’s deciding which table to sit at in a restaurant or choosing where to relocate for work, most of us take comfort in knowing that we have the final say.
This good feeling isn’t a random phenomenon: research has found that our need to feel in control is a biological imperative for survival. Because of this biological hardwiring, it’s understandable why we get a bit uncomfortable when our ability to choose is limited, or worse, taken away entirely.
However, we live in a world where we won’t always be in control of what we want or of the things that ultimately affect us. Instead, there are only a limited number of factors that we can control, whether fully or partially.
There are many definitions for it, but we will define the locus of control as “The extent to which we believe we can directly influence certain variables that affect specific outcomes in our lives”.
Knowing what falls within our locus of control is crucial because it helps us better direct our resources on variables that we can directly influence, instead of wasting them on things that are well beyond our grasp.
The argument can be made that many people needlessly make themselves anxious because they focus too much on external forces while not paying enough attention to what they can control. Some investors repeatedly make this mistake, and as a result, repeatedly make bad decisions that could’ve otherwise been avoided.
Stressing Over the Uncontrollable Is Futile, Especially in Investing
In investing, several variables are well beyond an investor’s locus of control. Daily stock prices, market index values, prevailing market conditions, political developments, economic performance, investor sentiment: the list goes on.
These are all important things that can significantly affect investors, but no matter how much they kick or scream, investors are powerless to influence them.
Despite this stark reality, many investors and speculators alike consistently stress over these matters, to the point that it almost seems like an automatic reaction for some. Whether it’s a sharp decline across key market indices, worse-than-expected economic data, or unexpected bouts of volatility, many investors both big and small have developed a bad habit of needlessly worrying over things they have no hope of changing.
Now, this isn’t to say these variables can be ignored – they can still affect an investor’s decisions and strategies. Rather, it’s a reminder that many variables, some of which are of great importance to investors, are well beyond their means to change.
It’s easy to succumb to a feeling of dread, but doing so will be of little benefit to investors. Instead, investors are better off having a thorough understanding of which variables affect them, and among them, which they can control.
Understanding Your Locus of Control as an Investor
As we discussed in the preceding section, there are a multitude of variables that investors have no hope of controlling. While this is the reality investors must come to accept, there are still several factors which they do have control over, whether partially or fully.
Choosing which investments to pursue, figuring out which investment strategies to pursue and when, setting specific investment goals, choosing how to react to bad investment news, and deciding which risk management procedures to implement are all variables that investors have full control over.
There are two types of variables that investors should worry about: the ones they can control, and the ones that affect them. The overlap of these two domains represents their locus of control.
By having a clear understanding of what they can and cannot influence, investors are better equipped to handle the various scenarios they’ll encounter throughout their careers by knowing how to appropriately respond.
Investors may not influence geopolitical/political developments around the world, but they certainly have the power to decide which countries to invest in based on geopolitical/political considerations. Bouts of volatility will always occur, but ultimately, investors have the power to decide how to react. Market sentiment can change at the drop of a hat, but investors can choose which strategies are worth pursuing.
Investors will never be able to control everything that affects them, but they don’t need to. Having control over a handful of key factors is more than enough.
Countless variables can affect investors, and many of them are beyond their control, but that doesn’t mean all of them are. Taking the time to understand what they can and cannot control can make all the difference in an investor’s career.
Successful Investors Operate Within Their Locus of Control
There are no “secrets” in investing that can guarantee any sort of success. There are, however, several ideas and principles that can increase the likelihood of succeeding. One of them is for investors to operate firmly within their locus of control.
No matter how much capital they have to work with, how extensive their knowledge is, or how many years of experience they have under their belt, the world of investing and global capital markets will always be affected by forces that no individual investor, regardless of how powerful they are, can ever hope to control or influence.
Despite this, many investors have gone on to achieve remarkable success in their careers by clearly understanding what they can control and never forgetting what they are. There will always be external powers that affect an investor’s portfolio, but that doesn’t mean they’re completely powerless. A multitude of important variables are still within an investor’s grasp.
If there’s one trait many successful investors share, it’s that they know exactly what their locus of control is and stay firmly within it. What’s the point in wasting precious time, energy, and capital on uncontrollable forces when they can instead be spent on factors that investors have full control over and will directly impact their success?
Wrapping Up
There are all sorts of factors, forces, and variables that impact our lives, yet many of them are well beyond our ability to control. Despite this seemingly discouraging reality, it’s easy to forget that there are still many factors which we can exert control over.
Investing is no different. There are many things beyond an investor’s ability to control that influence their activities, yet there are still several variables that fall squarely within their locus of control – it’s simply a matter of finding out what those controllable variables are.
By clearly understanding what their locus of control covers, investors can better allocate their limited resources to the factors they have the power to influence instead of wasting them on things that never will be.
Successful investors know what their locus of control is and stay firmly within it, maximizing their chances of success.
