sign direction right - wrong

I’m Right You’re Wrong… And ways we self-sabotage our path to investing well

I’m Right You’re Wrong was the name of a New York Magazine column in the early 00’s between former NY Mayor Ed Koch and former NY Senator Al D’Amato. There was some current/hot topic and the two “extremes” would barb back and forth. The title of this column came to mind as I was drafting this week’s article about

To what lengths will we go to be right?

Our mind wants to make sense of things. We want certainty. Certainty brings comfort and calm. In our need for certainty, do we inadvertently create stories to reinforce beliefs to make us “right”? And does this impact our ability to be good investors?

As an Adviser over these last 16 years, I’ve seen many of these stories and belief systems in action. I call these the I’m Right and I’m Still Right stories that investors hold on to for dear life. One central theme involves a belief system around something called the recency effect. This is where we place an emphasis on what has just happened while ignoring larger swaths of relevant data over longer periods of time.

I remember when Joe (not his real name) came to my office in early 2015. He had been sitting on a ton of cash since 2009, just after the credit crisis. Even though we were 6 years beyond the crisis, recency effect had Joe in its grip. He had this belief the market was going down again and was unable to re-enter the market. Together we put in place a slow re-entry investment plan. I’m a big believer that it’s about the time you spend in the market versus trying to time the market. Said another way:

To enjoy the swimming pool, one does not need to jump in the deep end…there are stairs and a shallow end that are just as effective.

So what happened to Joe? He became what he believed. We started with a small investment, to wade into the shallow end. And every time Joe and I had a conversation, the market was down. It was uncanny, how consistent this was for Joe. In our conversations over the course of one year (a short time period in the scheme of life), I suggested it would be a good time to allocate another small portion of money. But Joe was steadfast and wanted to see the upward trend before investing more. (Side note – there was a huge upward trend from 2009 to 2015 but the bias of the recency effect causes us not to “see” the longer term data.)

In August of 2016, Joe and I had our final conversation. He was convinced over the course of the prior year, the market would only go down and Joe liquidated his investment. I don’t need to tell you all about the upward trend from 2016 to 2020. And yes, Joe missed it.

As we look at the market over longer periods of time,
there are ups and downs.

There are even times when the market moves sideways. It is amazing the amount of energy and time some investors will spend to prove the “I’m Right” tale of their investing acumen and belief system.

If investing didn’t come with risk,
it would be called a savings account.

How to help mitigate risk is through the financial planning process.

When I think back to the New York magazine column with the two extremes, I always wondered (and still do today), what would have happened if they only collaborated on solutions vs. trying to prove their own opinions and being right. Seemed like a colossal expenditure of energy and time.

What beliefs are you holding onto to prove you’re right?

NOTES FROM RACHEL
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