As an introduction to the topic of money management and personal finance, I am going to start this series of personal finance columns for the Fort Worth Report by trying to explain the characteristics necessary to successfully manage one’s own money.

I first started using this analysis in 2008 after the Great Recession and banking crisis that came very close to tanking the economy. 

Today, with the advent of self-directed 401(K) plans, IRAs and index funds, the temptation is there to save money on fees and try to invest oneself into retirement prosperity via the internet and cable television.

But really, there are four abilities that successful investors need in order to manage their own money:

First, they must possess an interest in the process. It’s no different from carpentry, gardening or parenting. If money management is not enjoyable, then a lousy job inevitably results. Unfortunately most people enjoy finance about as much as they do a root canal.

Second, investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires the understanding of the laws of probability and a working knowledge of statistics. Sadly, as one financial columnist once explained, fractions are a stretch for 90% of the population.

Third, investors need a firm grasp of financial history, from the South Sea Bubble, to the Great Depression, to the Crash of 1987. Even professionals have real trouble with this one.

Markets are cyclical and move in patterns that tend to repeat themselves. They swing like a pendulum, from oversold to overbought and everything in between. Nature tries to seek equilibrium. The same force of nature applies to the securities markets, which are nothing more than the collective wisdom and emotion of human beings acting in concert.

Lastly, even if investors possess all three of these abilities, “it will be for naught if they do not have the emotional discipline to execute their plan faithfully, come hell or high water or the apparent end of capitalism as we know it,” William Bernstein wrote in his book, “The Investor’s Manifesto.” 

“Stay the course” sounds easy when the markets are rising. Unfortunately, it has been estimated that no more than 10% of the population passes muster on each of the first three counts. Wall Street is littered with the bones of those who knew just what to do but could not bring themselves to do it.

Following the path of least emotional discomfort is a road to failure. In my view, using a tested, systematic process is the only way to succeed in the long run.

I have been managing money for clients since July 1980. When I began 44 years ago, the Dow Jones Industrial Average was at 3513, the prime lending rate was 11%, inflation was running at 13.1% and a saver could get 17.4% for a six-month CD. 

On the flip side of that, the top marginal income tax rate was 70%. If an individual had invested money in the stock market in 1960, the average rate of return for the next 20 years was 1%. 

From 1980 to 2000, the average return was 18%. The average of those 40 years of approximately 0.9% per annum is how statistics skew the numbers. 

Timing does make a difference. Having a plan and the discipline to stick with it is the hallmark of good investing. More on that to come. 

John Rush Vann Jr., d/b/a Vann Investment, is a Registered Representative of Rhodes Securities Inc. and an investment advisor representative of Rhodes Investment Advisors Inc. Investing in securities involves the risk of loss. Securities offered through Rhodes Securities Inc. Member FINRA, SIFMA, SIPC insurance and investment advisory services offered through Rhodes Investment Advisors Inc. located at 306 West 7th Street, Suite 1000, Fort Worth.