Earlier today, Peter Lazaroff shared an excellent post that he created, which put together some serious wisdom from the financial blog-osphere. The lineup of blogging all-stars weighed in on an interesting topic: what’s the biggest mistake investors make? You can check out the post on Peter’s site here: https://peterlazaroff.com/2017/01/30/whats-the-biggest-mistake-investors-make/
I think all of the participating bloggers made valuable points that investors can learn from. However, Phil Huber‘s point was one that resonated with me. Here it is:
I wholeheartedly agree with Phil that inaction is often the right course of action for investors. Trying to outsmart the market by doing more is often futile and sometimes downright harmful to returns. This is a difficult, but critical, message to absorb. Left unchecked, hyperactive behavior wreaks all sorts of havoc on otherwise solid investment plans. Barry Ritholtz recently had the legendary Charley Ellis on his Masters in Business podcast, who commented on where this desire to do more likely comes from:
“When I was growing up, we read The Little Engine That Could. We were told that if you studied harder, you got better grades. When I got a job, I was told that if you work hard, you will get a raise and you might even get a bonus… Everything has to do with do more, work harder, and you’ll do better.”
Charley goes on to explain that this correlation between effort, action, and results doesn’t exist as linearly in the investment world. Phil’s answer to Peter’s question hammers home the same point. But how can we get this message across to investors who have been taught that effort and action = results?
I’ve actually seen a workplace retirement plan that’s doing a pretty good job of it. Let me explain. We work with a few clients whose retirement plan at work has an interesting quirk. When you go to make any type of transaction, it tells you it will be fulfilled at the quarter’s end. Then you can either order the plan to phase in the changes over one month, three months, or six months.
Without a good understanding of the plan sponsor’s motives, I’m going to assume this is a behavioral nudge. I think it’s genius. It forces you to heed Phil’s solid advice and wait a few weeks before acting. The plan essentially asks you, “Will this still be a good idea in a few weeks?”. Then, even if it is a good idea, it forces you to gradually implement it.
Why do I love this so much? For starters, if you’re making adjustments based on personal goals or circumstances changing, this will be unlikely to deter you from that. However, if you’re making changes based on an emotional response to market action, political turmoil, or the news of the day, this simple mechanism might cause you to rethink it. None of us knows for sure whether an investment change will work out favorably over the short term, so you better have a good reason for doing something, i.e., a legitimate change in your life or goals. When your changes won’t be implemented for weeks (or months), timing the market becomes even more impossible than it already is. This nudges investors towards Buffett’s “lethargy bordering on sloth” and away from Interactive Brokers’ “hedging trades on my cell phone at the dinner table”.
I think this is a behaviorally intelligent interface for workplace retirement plans. Unfortunately, I’ve only seen it on one plan. I also have a hunch that getting plan participants to willingly adopt a similar system would be like pulling teeth. I can’t imagine a brokerage firm trying to implement this either, despite the good it would likely do its customers. However, as an investment advisor, I can try to manually provide the same nudge the retirement plan provides its participants. Perhaps asking yourself or having a trusted advisor to ask you, “Will this still be a good idea in a few weeks?”, will be enough.