These are our daughters, Ellsley (2) and Cora (3 weeks). Being a parent the second time around has been a dramatically different experience. When our oldest was born, we worried a lot about sleep. Was she getting enough, could we get her to sleep, did she sleep long enough, etc, etc. We read everything we could get our hands on. If the book said she should sleep 16 hours a day and she slept 13, we were distraught that she would fall behind developmentally. As a result, we did anything we could to try to get her to sleep. Rocking her, bouncing her, walking her, driving her. For hours. Every nap and bedtime was a 30-40 minute exercise in physical and mental exhaustion. For weeks we wandered through life like drug-addled sloths in a haze of sleepless frustration.
In contrast, since Cora came home from the hospital we’ve been much less worried. She sleeps when she’s tired wherever she finds herself. In her chair, crib, carseat, on a blanket, in our arms. We let go of the illusion of control over her sleep.
You know what happened? She sleeps. She falls asleep on her own in her crib when she’s tired. We’re less tired, she gets plenty of sleep and the whole process is much more efficient. All because we recognized what we could not control and did less. Really, we did nothing.
This experience has led me to think a lot about the investment process. How many times do individuals and professionals take action under the illusion of control? In late 2008 and early 2009 investors thought they could protect themselves from temporary market declines, but instead liquidated equity portfolios at generational low prices. Financial advisors who shunned bonds in 1999, boasting of the “virtues” of all-stock portfolios, saw clients suffer large losses in the 2000-2002 bursting of the tech bubble.
Today investors race to hand their hard earned dollars over to an investment guru who promises to predict the movement of the markets. They pour money into “tactical allocation” mutual funds and fund-of-fund hedge fund strategies in hopes of avoiding temporary market declines. They watch CNBC, subscribe to newsletters, read Federal Reserve meeting minutes and delve into economic data, fooling themselves (or their clients) with promises that they will be able to sort the signal from the noise and create better outcomes for their investment portfolios.
To do nothing goes against our natural instincts. If stock prices fall, we rush for the exits. If interest rates rise, we scramble to make adjustments. If emerging markets have a good quarter, we chase returns and make a “tactical allocation” to that sector. But these activities are either backward-looking or based on our (very flawed) predictions about the future. As a result, they guide us to buy high and sell low more often than not.
Emotionally we resist the course of action most likely to be best: inaction. Turn off CNBC. Put down Money magazine and shut down your Twitter feed for a while. Focus on the things in your control: invest in yourself, your education, your professional and your relationships friends and family. You aren’t the chairman of the Federal Reserve. You aren’t running a high-frequency trading hedge fund. Check in with your financial plan, review your asset allocation, be smart about fees and taxes and spend your time and energy on things you can control. Ultimately, this will lead to your success.
Bason Asset Management 