One of the advantages of having an independent practice is that I get the opportunity to pick and choose the types of presentations and conferences that I attend. Rather than listening to biased corporate spiels and sales pitches, I’m able to hear from some of the leading minds in finance. I also get the opportunity to meet advisors from around the world and hear their insights. From chatting with these colleagues, I’ve learned that investor behaviour is the same pretty much everywhere.
At one recent conference, an advisor from Cincinnati mentioned that for his clients, the last couple of years have felt like being in a financial traffic jam: as soon as you start building some speed you end up having to slam on the brakes. While investors have made progress over the last few years, it certainly doesn’t feel that way. The general perception is that we’re stuck in the slow lane with danger signs all along the road.
When we’re caught in rush-hour traffic, there’s really nothing we can do but grip the wheel and bear it. But most drivers don’t have that kind of patience: instead they constantly change lanes in search of the fastest one. They listen to traffic reports and try to find alternate routes. Of course, all the other drivers are doing the same thing, so soon those alternate routes are jammed, too.
Investors in difficult markets have the same tendencies. They “change lanes” by switching from one strategy to the next—for example, giving up on diversified portfolios in favour of picking stocks or chasing a hot asset class like gold or real estate. They might even pull off the road altogether in search of safe havens, or try entirely new opportunities like flipping condos. Here again, our actions are mostly futile. Changing strategies might make us feel like we’re doing something, but it isn’t likely to get us to our financial destination any faster.
The Other Lane Isn’t Any Faster
More than a decade ago, a researcher at the University of Toronto did a fascinating study on why drivers are so compelled to change lanes. He concluded that people “overestimate the speed of vehicles in the next lane, believing that they are moving faster even when both lanes have the same average speed.”
Surely investors suffer from this same illusion: when they feel their portfolio is going nowhere, they’re more sensitive to news stories about hot fund managers who are clobbering the market, or the guy at their kid’s soccer game who’s boasting about his huge bet on Apple. They conclude that most people are doing better than they are, even though that’s probably not true.
The research shows this behaviour isn’t just futile, it’s dangerous: one study found that 10% of crashes occur when drivers are changing lanes. But it goes deeper than that. The author of the U of T study later told a journalist that he’d learned something profound in his interviews with drivers who had been injured in accidents: “For many of them, there’s this tremendous sense of remorse or chagrin—you know, if they had only behaved slightly differently, they would have never ended up in hospital.”
I suspect a former client of mine felt the same way when he sold his balanced portfolio in February 2000 to load up on technology stocks one month before the dot-com bubble collapsed because “everyone is getting rich buying tech stocks.” I remember another prospective client who decided not to invest in a balanced portfolio in 2006 because he was convinced that buying property in Florida was “shooting fish in a barrel.” My guess is that if you asked these people now, both would have similar regrets.
The research is clear that investors are almost always better off just staying in their lane. That’s why it’s important to have your long-term strategy in writing: whenever you’re tempted to change lanes, you can review the strategy and be reminded of the importance of sticking to the plan. Like a traffic jam, it’s never fast and it’s occasionally frustrating, but eventually the road ahead will be clear.