- Posted by Brad Bridgewater
- On December 11, 2015
- execute, planning, predict
Empathy gap is the inability to predict your own future behavior under stress. In other words, the likelihood of you making an emotional decision instead of an intellectual one. As a pilot, this is the reason the simulator throws every nightmare possible at you during training. Your training prepares you to make the right decisions under difficult conditions when you pilot an aircraft. The training drives out the fear and the feelings associated with the decisions you make under those circumstances. The training takes over and good decisions are made, giving you the best chance for a successful result.
Humans are also optimistic by nature – we forget the bad decisions and outcomes and remember the good. The further back those bad decisions are, the more we forget how painful they were. The last six years have been one of the longest bull markets in history. If you were invested in the markets at all, you probably did just fine. The memories of 2000 and 2008 have faded. The general view on investing has come back to “I can do this, it doesn’t take a lot of effort.”
THE IMPORTANCE OF TRAINING
A pilot’s years of knowledge, training, and experience take hold when a tire blows out on takeoff and gets sucked into an engine. I experienced this as a passenger in 2012 and I have to say, it was frightening. I learned the following day, as I told this story about my DFW-SEA flight to an Alaska pilot, this particular scenario is well covered in training. He nodded his head as I told the story about the bang, the engine knocking, the pilot cycling the power up and down to figure out how much that engine had to give.
Our well-trained and very calm American Airlines pilot came over the PA and told the passengers what had likely happened and what he was going to do next. He turned the plane around, had the tower look at the gear and then set the plane down lightly and rolled for what seemed like forever before gently setting down the front gear with its one good tire. It was in that moment, as we finally came to a stop, that I fully appreciated a well-trained, competent, dedicated, professional airline pilot. You don’t really need one for the sunny day when everything goes smoothly, but you do need an experienced professional when a tire blows and takes out an engine.
Investing is very similar (although no one’s life is in danger). There is an empathy gap when it comes to investing and most people are not trained on what to do in the event of an emergency. Even knowing the theory doesn’t help when the markets are going south and all you want to do is take yourself to cash (which is never a good plan). Going to cash is not a strategy, it’s the investing equivalent of putting your hands over your eyes.
PLANNING AND EXECUTION
You have to plan, prepare and execute, not predict. As I write this, the S&P 500 was down almost 2% today (Friday, December 11th), has been headed south since November 20th and is now down over 2% on the year. What does this mean? What will happen Monday? Can I predict that based on what happened today, last month or this year? A pessimist would predict that the markets will be down tomorrow and an optimist that they will be up. Who’s right? Predicting the market on a daily basis is similar to playing roulette in a casino. The ball landing on red seven times in a row means nothing about the next spin of the wheel, the odds are still 50/50 every time. No one knows what the market will do day-to-day.
I have no idea what the market is going to do tomorrow, in January or in 2016, and neither does anyone else. I’m very hopeful that we will get a bounce tomorrow and that the market has needed a little pullback to reset and spur another leg up in this long bull market. The reality is, I have a financial plan and an investment strategy for the next thirty years and the movements of the market on a particular day don’t matter when it comes to the success or failure of my retirement plan. I have had training on what to do in an “investment emergency.” My experience and training don’t involve feelings or predictions, it involves planning and execution and that’s how I know my retirement plan will be successful.
Having said that, should there be action taking place in a portfolio? Of course, there should. We have been moving our clients’ portfolios to a more conservative stance for some time now (shorter duration fixed income and less volatility in our equity selection and a little more cash) because we believe the bull market is getting long in the tooth and a correction is in our future. Does this mean it’s about to go down? Not necessarily, but when the odds are moving in that direction, we protect our clients on the chance that it does by asset selection and allocation adjustments, not market timing. The most important thing is that our clients are in the correct asset allocation for their unique situation and that we stick to the plan to put them in the best position possible for a successful result.
WE CAN HELP
Planning and execution work. Can you do that with your own investment and retirement plan if you wanted to? Of course, you could. The real question is; do you have the time, discipline and experience to do it effectively? Our clients hire us because they want a professional handling such an important and complex part of their lives. They want to focus on their families, careers or just enjoy their lives and let us do this work for them. They want an experienced professional making decision based on current information and probabilities of success.
For assistance with your own personal retirement and investment plan, please call us at (972) 684-5923.
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Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security.