The importance of context
What do you think of when you hear the phrase “a dingo ate my baby”? Do you automatically think of Seinfeld? If you didn’t watch the show that statement might not make sense to you at all, because you have no context to fall back on. You might even be very concerned about the current dingo population in North America and the looming danger to our children, which of course is not a thing.
What is context?
Context is a big part of our communication as well as our ability to process information. We are constantly cataloging mental files or calling upon them to assess situations. It gives us reference to a certain time, emotion, or understanding. For example, when I hear the first two notes of Bob Marley’s “One Love” I think of my wedding — because that’s the song we played for our recessional. And it was awesome!
Finding the truth
Building context is natural and is a way to learn, i.e. “I touched a lit match once and it burnt me, so I will not do that again” (me, age 4. And age 10.) But what happens if you built your context without proper information? Let’s say you meet someone for the first time and they are rude to you. What you didn’t know is that person simply just had a bad day — and by the way — that person was Mr. Rogers. You’d walk around thinking that Mr. Rogers was a jerk, and I would say that you couldn’t be further from the truth (may he rest in peace.)
Basically, you don’t have enough information to understand the situation and end up making a poor judgment. The only way to change your opinion is to gather more information, essentially changing your perspective and arriving at the truth of the matter.
Context is key to investing decisions
Context is so ingrained into who we are as humans that it dictates the way that we invest, too. If we don’t have a proper view of the markets it can distort our expectations, leaving us fearful… or greedy. That might lead to poor investing choices, which might lead to a failing portfolio. Take this for example:
- How does the economic crisis of 2008 effect the way that you look at the markets today?
- How deep did the damage go that it has you reaching for the Tums every time the market drops more than 100 points?
- On the flipside, how do the great returns from 2017 alter your expectations of account growth?
If you only catalog those two years — completely forgetting everything in the middle or before — your context isn’t built using the whole picture. What if you parented your children the same way, only on the highest of highs and the lowest of lows? Your family would be emotionally wrecked and exhausted.
Make sure you get the whole picture
And that is how some feel about the market. Those flashbulb events are the only pictures we have in our mind and do not provide for complete understanding. Yes, those big moments in time are significant, but a lot happens in the middle as well.
So, have you picked appropriate amount of risk for your portfolio that will serve your mental state and timeframe well? Do you have a financial advisor who can help coach you through the changing markets? (Shameless, yes, but we’re here to help!)
Control your flow of information
Lastly — have you controlled the flow of information to help you become a knowledgeable investor, while not paying mind to the headline of the day? Headlines are meant to grab attention and if your heart is swayed at every bold print word, put down Twitter and the flashy news apps and read a book on investing instead. (My colleague Lorin calls that constant bombardment “noise in the system!” In any case, it can make for very poor context.) Overall, it’s best to always build proper context with information and guidance — rather than assumptions or brief moments in time.
Remember life is a campaign, not an event.
November 2018Contact Author