The failure of timing
Planning works because there is so much out of our control
We know the powerful effect that bias, often unseen or felt, can have on our decisions, not only with one’s investments, but in race, gender, the workplace and life in general. We have our predispositions and our preferences. To lesser and greater degrees, we also can be disappointed or vindicated by what’s happening in the world because of what we perceive and label as good and bad or worthy and unworthy.
We know about confirmation bias as the ability to glean what we want from the facts. A farcical cultural example of confirmation bias can be seen in the “Deflategate” controversy: dueling sides with very different perspectives on the same set of incomplete facts to determine what, if anything happened, and what punishments, if any, should be levied against the accused parties.
In a recent CNBC column, personal finance expert Tim Maurer addressed the issue of “recency bias,” or the often detrimental investing assumption that good times today pave the way for more good times tomorrow and beyond. It is the basis of momentum investing, which has failed miserably in recent months, just as it did in the “dot-com” bubble.
“When it comes to the market’s peaks and troughs, investors often don’t react as rationally as they might think,” said Maurer, director of personal finance for Buckingham and the BAM Alliance. “In fact, in times of extreme volatility or poor performance, emotions threaten to commandeer our common sense and warp our memory.”
We have managed this type of response too many times to count.
A close relative of recency bias might be called timing bias. As in life and investing, timing can be everything, and those who try to gain maximum investment return by timing the market have displayed a track record of consistent failure. Our practicing philosophy of insisting that long-term strategic tax, allocation and risk-planning is the only reliable approach is based on a simple, fundamental truth: There is so much out of one’s control. Planning works.
We know this does not sit well with many successful professionals who have proven through talent and hard work that they can control their destiny. But just because the sun is shining brightly today on one’s fortune or destiny, it does not mean that tomorrow’s forecast might not include a flood of bad outcomes completely out of one’s control.
Consider my favorite hypothetical character, a successful businessman and investor riding high in September 1929. He is also leveraged to the hilt on borrowed money because he believes, as many do, that the stock market will go up forever and those margin loans will be paid back with the profits from certain future stock sales.
We know this smart investor put all his eggs into one basket and couldn’t imagine a market crash so horrendous that it would drag the world into a Great Depression. His net worth was decimated within a few days.
Not everything will be as catastrophic as the Great Crash of 1929, but those who believe they will ride the wave of prosperity to lavishly finance their retirement without the basic discipline of savings might be in for a rude awakening.
We had many clients retire in the mid- and late 1980s and have found that their current net worth hadn’t changed at all despite the extended withdrawals that they have taken from their nest eggs. Timing helped them too, but may not help those who retire in a lower-return environment. The sequence of events can be critical.
Unfortunately, we can’t control an unexpected medical emergency or professional or economic downturn. The good news is that we can control how we prepare financially. One of our suggestions is to plan to live on less than what is comfortable, and then sticking to and living within that plan. One can always control the outflow of one’s assets through proper tax allocation and managing cash expenditures.
I was impressed by a recent story of Ryan Broyles of the Detroit Lions. He had signed a four-year rookie contract in 2012 for $3.6 million with a little more than one-third of it guaranteed. Rather than falling into the well-known trap for many professional athletes of living like a millionaire for life, Broyles embraced the wisdom from an advisor who encouraged him to save and plan for tomorrow.
Broyles and his wife live on a budget of $60,000 a year, which displays admirable restraint. Though I wish Mr. Broyles a very long and safe career, it is clear that even in the worst-case scenario, his financial savvy is a winning game plan.
Tom Sedoric, a nationally recognized wealth manager, is managing director-investments at The Sedoric Group of Wells Fargo Advisors in Portsmouth, 603-430-8000 and thesedoricgroup.com.