Elbert Hubbard (early 20th century writer, artist and philosopher) wrote
“Many people fail in life, not for lack of ability or brains or even courage but simply because they have never organized their energies around a goal.”
Personal goals that are specific, measurable and tangible are real. They exist to a person.
By focusing on the long-term picture, knowing what one really wants, a person is less likely to be deterred or swayed by the constant whine of talking heads. “Goals provide the reason to stay on course” and avoid committing financial suicide by wild changes in asset classes or over-concentration in the hot stock, asset or trend.
Unfortunately, most people I come across have no specific goals, no specific road map or compass (what I call an Investment Policy Statement) so they are like a leaf blowing in the wind susceptible to whatever blows by next. Their non-goal is unlinked to their specific need; there is no strategy in place. So they become susceptible to the Siren’s Song. They hear their neighbor made a killing in real estate or that there is this Hedge Fund genius named Madoff so get on board or lose out.
We live in an age of 24/7 communications, always connected and always on. So the slightest hiccup is telegraphed and becomes a trend. All of this makes investors more like lemmings in a herd instead of rational beings.
In a recent issue of the Journal of Financial Planning (January 2009, www.fpajournal.org), Dr. Conrad Ciccotello, a financial planning professor, reviewed the various recent bubbles and how they impacted the assumptions of many of his graduate students. He noted the Tech Bubble and Real Estate Bubble as examples.
Throughout each of these periods, he observed that otherwise smart people tend toward a “herd” mentality and even more so than those not so well-trained or “in the know.” During the boom years, assumptions were always made that the gravy train would last forever, “things are different this time” and all one had to do is sit back and figure out how to spend the millions one would have by the age of 30.
On the other side of the roller coaster ride, doom and gloom prevailed.
We see this outside the classroom, too. Just look at professional portfolio advisors. With their compensation tied to benchmarks, their almost required to be fully invested even if things look like their ridiculously priced. Waiting with cash on the sidelines might be the smartest thing to do but would ruin one’s tracking with the index for instance.
Whether a “Master of the Universe” or the “Do-It-Yourself” Investor, we see short-term horizons displace long-term goals. Being a slave to the constant “financial pornography” that proliferates as white noise means that one can easily lose sight of guiding principles. Even “experienced” investors have been ruined by bubbles … being in the wrong place at the wrong time, trying to squeeze out the last 1/8th of profit.
Research has shown that most people fear loss and want certainty. (Why else would most people opt for fixed rate mortgages even if they are likely to relocate and sell a property sooner than 30 years?).
As Dr. Ciccotello notes, “The client will be less likely to abandon the strategy which is aimed at maximizing the probability of success for a riskier one during good times (or a lower risk one during poor times). Would an investor like to risk their kid’s college fund, their down payment for a second home or the source of income for retirement by being right “on average” following a benchmark? Or would they want to meet their goals with absolute certainty? Most people opt for certainty. Wouldn’t you?
Ultimately, herding mentality leads to rationalization about valuation (Pets.com at $400? No problem). Then the band wagon effect follows, the asset bubble explodes and the wagon goes over the cliff.
It may seem safe in the pack. But actually having one’s own strategy, discipline to follow it and a tangible goal is actually less risky than trying to follow the short-term horizon of a benchmark.