Outcomes Matter
Dana here.
Outcomes matter. To design a plan, a strategy, an approach, or pretty much anything at all, you have to know not only the outcome you want but the time frame over which it needs to happen.
Let’s take running as an example.
- The fastest 50-yard record is held by Stanley Floyd with a time of 5.22 seconds.
- The current world record for one mile is 3:43.13 minutes, set by Hicham El Guerrouj of Morocco in 1999.
- Eliud Kipchoge of Kenya holds the fastest official marathon time of 2:01:39 hours, a 4.41 minutes per mile pace.
- And, at 11 hours and 19 minutes, Manitowoc native Zach Bitter recently set the world record for the 100-mile run at a pace of 6 minutes and 48 seconds per mile.
One of the common mistakes short-distance runners make when first attempting a longer race is they start off too fast. The same strategy that wins a one-mile race will cause you to fail in a marathon.
With investing, your approach also needs to vary depending on the time frame.
In his book The Psychology of Money, Morgan Housel says, “There are few financial variables more correlated to performance than commitment to a strategy during its lean years – both the amount of performance and the odds of capturing it over a given period of time.” (By the way, this book is my new favorite book on money and would make a great holiday gift for just about anyone on your list.)
Committing to a strategy over its intended time frame is the hallmark of great investors. But during times of volatility, such as a year with a global pandemic and an election, it can be tough to do.
During the weeks before the election, I received calls and emails from investors insistent that if the candidate they opposed won the election, the market would tank. One investor was confident we’d see a decline of 40-50%. I'd field a call from an investor insistent that a disaster was imminent. Their rationale was identical to the person on the last call – except for the opposite candidate.
These conversations are challenging. When the country is relatively equally split, logic tells you that if each side believes the market will tank if their side loses, then what should happen is the losing side would be selling, and the winning side would be buying, and the two sides would balance each other out. But logic is often to no avail when someone is in an emotionally heightened state. And that simple logic doesn’t account for the multitude of cash on the sidelines and the billions in pensions and institutional funds, which make decisions for vastly different reasons than an upcoming election.
As an advisor, we can see during these event-driven times that while we are focused on winning the 100-mile race, our investor has narrowed their vision to the 50-yard sprint. We do everything we can to remind them that the strategy we put in place was not the one to win the 50-yard sprint, because that could mean losing the longer race and putting their future retirement income in jeopardy.
As it turns out, post-election, holding on to your long-term strategy was once again the right move. But plenty of statistics and data told us it would be the right move. It’s emotions that make us question it when the immediate future appears so uncertain.
I know how hard it is to stick with extended frames when it comes to your own money. The majority of my money is on auto-pilot in my 401(k) or managed by my firm in my IRAs. I don’t trade on these accounts. Because I know if I do, I’ll get emotional and make less than optimal decisions.
But I keep a small amount of “play” money, and every other year or so, to remind myself how challenging the markets can be, I decide to buy something. Early this year, I decided to buy some cryptocurrency. Cryptocurrency is based on blockchain, which I equate to a type of programming language for contract verification, and I believe it will change the world. However, there is no telling which cryptocurrency, if any of them, may flourish because of blockchain technology. Still, I decided it could be fun to invest a small amount of money. I wrote down, “10-year hold time.” In my mind, this was a 10-year play. A month later, it was up in value, and I sold it. I sold right before a major upswing in the crypto market.
Why did I abandon my 10-year hold time in favor of capturing a quick $100 profit? Honestly, I don’t know. I’m human, and we make illogical emotional decisions. And that is why I don’t trade on my retirement money. If I’d had an advisor for that cryptocurrency, they’d have reminded me of my time-frame, and I’d be thanking them today.
Why is it that I can give my clients the appropriate advice, invest for the long-term, get them to stick with the strategy, and then not use that same discipline for my small play account? I don’t know. I am aware, however, that it is a common theme among humans. Only a minority of people have the emotional constitution and discipline needed to manage and trade their own money wisely. If you’re among that minority, that’s fantastic. If you’re not, hiring an advisor may be the best decision you ever make.
We work with clients in 27 states and are happy to offer a complimentary discussion where we explain what we do so you can determine if it is a good fit for your needs. To schedule a time, please complete our Pre-Meeting Questions, and we’ll reach out via email.
Our next free, live webinar, How to Make a Retirement Income Plan, will be held on Thursday, January 21, 2021!
How much will you need to retire, and where will it come from?
In this class, we will show you how make a detailed retirement income plan by creating a series of timelines that chart out your future income and expense. You will see how you can put together a crystal-clear picture of your future retirement income. We will go over:
- How to make a retirement budget and the most commonly overlooked expenses
- What a future income timeline looks like
- How to calculate how much you will need to withdraw each year during retirement
- Mistakes people make with their assumptions about inflation and rates of return
- How to see if your retirement money will last
We will leave plenty of time for question and answers at the end.
When: Thursday, January 21, 2021 5pm AZ/ 6pm CST/ 7pm EST
You can register at How to Make a Retirement Income Plan
Video
If you missed out last webinar, 10 Scary Money Moves for Near Retirees, it is a perfect introduction to the decisions you’ll face – and the emotions you’ll feel – as you consider the transition into retirement.
It is normal to feel nervous, even terrified, at the thought of no longer having earned income. You can watch the recorded version on YouTube: 10 Scary Money Moves for Near Retirees
Podcasts
Control Your Retirement Destiny Podcast
Download and listen to the Control Your Retirement Destiny podcast at:
Sensible Money in the News
Congratulations to Dana! For the third year in a row, she has made Investopedia’s Top 100 Top Financial Advisor List! Check it out here: Investopedia 100 Top Financial Advisors of 2020
Dana contributed to this article from Yahoo! Finance about how to protect your savings during this uncertain time: How To Protect Your Retirement Savings During the Coronavirus Pandemic
Azcentral.com quoted Dana in this article: When retirement arrives sooner than expected: What to do, what to know
Financial Sense is an almost-monthly publication of Sensible Money. It's about financial planning and smart money decisions, not sensation and hype. You know.... sensible.
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