You have to live through the statistics

The main reason we employ a tactical investment approach alongside a balanced, strategic approach for our clients is that life is not lived in 20 year increments. We live in increments of days and weeks in real life, and when something is causing us pain, we feel it acutely, in the minutes and hours during which we experience it.

No one wants to see a two-decade chart illustrating long-term wealth creation at a moment when wealth destruction is removing years of savings from their portfolio and they can watch it happening in real-time, on an iPhone app. Buy-and-hold purists may take issue with the concept of tactical asset management, but most of them are not in the trenches, responsible for the well-being of hundreds or thousands of individual households and the safeguarding of their futures.

It’s great if someone can ignore massive rallies and drawdowns and just go about their business knowing things will work out in the end. It’s ridiculous to suggest that this will be the experience of most people, especially once the dollar figures on the line approach seven figures or beyond.

My friend Morgan Housel wrote a masterpiece of a blog post this past week that looks at 20 psychological issues confronting all of us, in investing and in life. He talks about leaving room for error in our plans, and in our portfolios.

Here’s a thought about how much room might be necessary – not based on math but based on our emotions:

There are also multiple sides to room for error. Can you survive your assets declining by 30%? On a spreadsheet, maybe yes – in terms of actually paying your bills and staying cash-flow positive. But what about mentally? It is easy to underestimate what a 30% decline does to your psyche. Your confidence may become shot at the very moment opportunity is at its highest. You – or your spouse – may decide it’s time for a new plan, or new career. I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets can model the historic frequency of big declines. But they cannot model the feeling of coming home, looking at your kids, and wondering if you’ve made a huge mistake that will impact their lives.

Josh here – Balancing the idea of long-term compounding, the need to endure volatility and the truth about the average investor’s wherewithal to accept pain is where both the art and the science of wealth management come in. Anyone can create a model and compile historical statistics. Not anyone can live through the new statistics as they’re being created, with all of the consequences and pressures that attend them.

Please read Morgan’s whole post. It will blow your mind.

Source:

The Psychology of Money (Collaborative Fund)

Read also:

My Evolution on Asset Allocation (A Wealth Of Common Sense)