Whenever we think up and formulate some sort of strategy it's tempting to only look at things from a "happy path" perspective. That is, the straight road that we need to walk on in order to reach our goal, giving little to no heed to the perils or challenges that we'll inevitably be faced with.
Using financial independence as an example, we plan out how we're going to spend our money more efficiently and how we're going to invest a decent portion of our income into long term investments that will compound over time. We give a brief nod to the fact that there'll be some bumps along the way, a market crash or a leaky roof for example, but we quickly extrapolate into the future where things have recovered and we're back on the straight and narrow.
But when the "unhappy" situation finally arises we may find ourselves somewhat flustered and feeling a little out-of-control. Things aren't playing out the way we imagined and as we scramble to try and fix whatever is going wrong, they only seem to be going from bad to worse.
In such situations it's important to remember how to get back to a position in which we felt we had a solid grip and foundation, a position in which we feel in control.
This is called resetting your position and I've got an example of how I used this to help me regain control of my trading position when I worked as a day trader.
But first, let's start with an example that I think we've all experienced before.
We're in a new place; somewhere we've never been before. It could be that we're on holiday in a new country, or we're camping in a nature retreat, or we're simply on the road and driving to visit an old friend.
There's a specific destination that we're trying to get to in this unfamiliar location.
The local restaurant that everyone has recommended. Back to the campsite after trekking up one of the mountain trails. Our friend's home that is tucked away in a cul-de-sac of a town we've never been to before.
But we're lost.
Before we got lost we had a general sense of direction that we were trying to follow.
Enter the metro station next to our hotel and go three stops north. Head down hill and follow the stream until it forks, then follow the right fork. Take the third left turn from the post office and keep going until you see a primary school, take the second right from there and then follow the road to the end.
But somewhere along the way we missed a turn or a stop, and now we've veered off course a little.
What do we do?
Obviously we could keep going in the hopes that we'll accidentally (or luckily) find our way, but chances are we'll only get more and more lost and decrease our chances of quickly recovering from the situation.
Instead it's better that we "reset".
We retrace our steps and go back the way we came, and we're trying to find a particular place that we recognise or are at least more familiar with. Maybe we remember the name of the third metro stop that we got off of, or we find that fork in the stream once more, or we find our way back to the post office before we took a wrong turn.
We're getting ourselves back into a position where we know where we are. Where we feel we have control. And it is from that point that we continue making our way forward once more.
I used to work as a day trader and would build up positions in my trading account across a wide variety of futures markets. Interest rates, oil and gas, copper, milling wheat, lean hog, sugar and more.
Wherever there was activity I would be involved in some shape or form.
I'd be long 50 "lots" of March futures while being short the same amount for June, known as the March June spread. Meanwhile on another trade I might have entered a position that was 35 "lots" long June and short December. Meaning my overall position in June was 15 "lots" short, and potentially at different prices.
Don't worry if you didn't follow any of the above, just know that there was complexity in tracking all my trades. Each day I'd make hundreds of trades like the above, building up positions that would criss-cross against each other resulting in a complex overall position.
For the most part I'd know what that overall position was and if it was in line with my trading strategy. But sometimes when the markets are a little more active and I'm rapidly trading in and out of positions during the heat of movement, I may end up losing track a little bit.
In the aftermath, once things have quieted down, the position in June is telling me +150. This means I'm long 150 lots but I could've sworn it should've been +175.
Obviously I'll try to confirm my own calculations to make sure I haven't missed something; but if I can't, it's time to reset.
This could mean one of two things.
The extreme is to unwind all my positions so that I'm completely flat and starting from scratch, or get back to a long June position that I know for sure is correct and aligned to my position in all other future months.
Once I've slowly unwound my unknown positions I will once again be in a spot to continue trading with confidence, knowing how each new trade affects my overall position and if that is in line with the trading strategy that I'm trying to apply.
Resetting on your path towards financial independence
Time to bring this back to financial independence.
Like I said, we like to fast-forward in our minds to a time where we've done all the things we need to do and are happily living off a 4% safe withdrawal rate. In our eagerness to try and get to that life, we start to do lots of things in the hopes that it will expedite our journey.
What started as saving a consistent 25% of our monthly income and putting it into a low cost and well diversified index fund, while also maintaining our mortgage payments, has transformed into a concoction of different "ventures".
The hope being that at least one of these things really takes off and cuts a couple of years, maybe even a decade or two, off our projected timelines towards early retirement.
We started to buy individual stocks based on tips or hype.
Cryptocurrency now makes up a portion of our investment portfolio, and that portion seems a little too large.
We bought leveraged funds.
And maybe even took out a new mortgage to purchase a rental property.
Plus we're doing two side hustles on the evenings and weekends in an attempt to create additional income streams outside of our job.
In short, it's all gotten a little whacky and though there was plenty of excitement towards the start, things are now taking their toll.
None of the individual stocks or cryptocurrencies have "blasted off" in the same way we were reading about before, in fact they seem to be hovering just below where we bought in with no intention of doing anything good in the near future.
We know, because we've been checking every hour of every day to see if anything has happened.
The economy also seems to be slowing down, causing a slight fall in the markets. But from our perspective it's extra painful since our funds are leveraged.
And that tenant seems to be particularly troublesome with all their requests for fixing the heating or the toilet, and needing this or that or another. The fact that the rent they pay only just covers the mortgage on the property is making this look far less lucrative than we previously assumed.
Plus there's all those hours we're putting in to those side hustles with little to no return.
This picture I've painted is obviously exaggerated in how dire things seem. Some of the ventures mentioned above can be worth exploring, but only if you've got a really solid foundation on your personal finances.
If you haven't, and you take too many different "interesting" things on at the same time, you could find yourself feeling a little overwhelmed and lost. The path towards financial independence no longer feels as sure and steady as it did once upon a time.
And so, it's time to reset.
You remind yourself of the time when your personal finance machine was working like a well oiled machine. You had your living costs covered and was hitting a consistent savings rate that would surely bring you to financial independence in the future, and your investments required little to no effort to manage.
Reset your position back to that status.
Re-establish a strong foundation and regain your control.
And once you've done this you will once more feel like you're back on the sure path towards reaching financial independence.