A computer systems designer’s view of the world is that the hardware works, the firmware works, and the software works. It is the liveware that causes the problems.
It is not so different when it comes to investing.
We are all, every one of us, our own worst enemy. We have an intellectual time envelope that is too short for our needs. We can recall three or four years of the past with some clarity and can estimate about a year into the future and that with difficulty. The rest is an emotional blur. Doing the investment component of a financial plan requires much longer time frames. Poor fit. Liveware fails.
Beyond the near term, we guess the future. The projections we make are more a representation of our experience, beliefs and biases than they are of any objective reality. If you don’t guess then notice that your advisers do. While they have more experience and more objectivity than you, they still have beliefs and biases. Liveware fails.
The big liveware bias is impatience.
It is closely coupled with end point bias. The current event is the only one that matters and why was I not doing this?
Another problem is fear of loss and its companion fear of missing something good. Probably we should throw in the absence of any clue about random events, too. You will almost always miss outcomes that occur randomly.
If these traits are allowed to propagate, the collection leads to unpleasant outcomes.
When you invest, you are merely moving money from now to the future. When in the future is your decision. Say retirement years. If you are investing for a 30 year long period that starts 20 years from now, how can it make sense to check the progress every day or every month or even every year?
Think about it! Carrots take about 70 days to mature. If you plant carrots in your garden, do you dig them up 3 times a day to see how they are doing? Probably not.
Digging up the carrots 3 times a day is about the same as looking, once a month, at a portfolio with a 20 year time horizon. If you look at the carrots three times a day, the probability of the carrot turning out well at maturity is likely not far from the probability of your portfolio turning out well. Close to zero chance.
What could you learn from digging up the carrot anyway? What if neighboring carrots were not doing the same? Do you even know the standard? Is each 8-hour period identical? What should/would you do if growth fails to meet your expectation? Should you change the plan or recognize that your expectation was likely wrong or things are a bit random?
Similarly, looking at your portfolio each month, what could you possibly expect to see that would be the basis for sound, objective action? There are not 50 people in the world who know, with precision, what is going on in the general market in 30 day periods. You are not one of them and neither is your adviser. Warren Buffet does not know and says so. So should you. Be humble.
What to do?
Investing is hard, especially so if you emphasize the wrong factors. Emotions are bad. Failing to get paid for everything you invest is bad. Feeding off other people’s emotions is bad. Not recognizing how reality works is bad.
The economic system we know has been around for a long time. Find a way to participate in it and trust that it will work for you.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. email@example.com