When we are young, if we put our fingers on a hot stove, we get burned and learn not to do that again. We are given gold stars and other rewards for correct behaviour. We naturally seek rewards and avoid punishment, and in childhood, there is very little time lag between behaviour and the reward or punishment.

Unfortunately, adulting doesn’t often have that immediate feedback. There is often a long time between taking the wrong action or series of actions and the results. This is particularly true in the realm of personal finances, where the real benefits of sustained good decisions or the actual consequences of sustained poor choices are not often fully experienced until many years down the road. In particular, the issue of variance is a thorny one.

The challenge lies in the fact that most people don’t truly understand variance. Despite the extensive, high-quality personal finance educational content and evidence that exists today, reward-seeking remains part of our human nature. This is what makes variance so hard when it comes to investing. Poor decision-making can be rewarded in the short term due to variance, and solid decision-making can be punished in the short term.

What happens when we get rewarded – particularly outsized rewards? We tend to repeat the actions that led to those rewards. This is where we sometimes see investors begin to take inappropriate risks in their portfolios. It’s a dangerous combination of the early reward, and the lack of real understanding that those early positive results are not in fact the result of good decisions, but rather due to variance. And that same variance that rewarded the earlier poor decisions, comes back later with a vengeance to on a portfolio that is now far outside of reasonable range for that particular investor. Similarly, a person can take the exact right steps, but their first baby steps may result in early dips in value, which they may incorrectly attribute to having made a mistake, rather than realizing that it’s just variance, and that the two things that smooth variance are volume (many good tiny decisions), and time. There is no substitute for time. Over time, the series of good, correct actions will compound into an outsized result relative to repeated poor decision-making.

So, how do we deal with the fact that sometimes our reward-seeking nature is at odds with what is actually good for us? The trick is to accept our nature and find a reward system that works with it. One strategy is to build short-term rewards for actions rather than focusing on results in the short term. I’m really big on micro habit goals—very, very short-term goals that we can hit consistently. One excellent resource on this subject is Tiny Habits by BJ Fogg.

By setting and achieving and CELEBRATING these micro goals, we create a sense of progress and accomplishment. This approach helps us maintain motivation and stay on track with our long-term investment strategy, even when short-term results might be discouraging due to variance. Remember, every small step counts and deserves recognition.

In short, personal finance is counterintuitive. What’s intuitive is to focus on short-term results and while dismissing the tiny, almost inconsequential seeming behaviours. However, success requires that we do the opposite: be very attentive to the micro-behaviours while ignoring short-term results and taking the long-results view.