Steven Crevar is one of my newest connections on #LinkedIn. If you’re taking morning walks with me on #Instragram or following #MunchMac in Houston, Texas, you know that I was supposed to meet with Steven for an interview this week – but his job got in the way (hate it when that happens).
BTW, Hope you had a wonderful time with your family celebrating America’s Birthday. I did. We had a house full of family. Early Friday morning, my wife, Connie, and her sister (Aunt Pat) got into a very interesting conversation about paper “maps” vs. Technology (think Google Maps on your iPhone).
Connie’s late Grandpa (he was one of my favorite people in the world – he was a truck driver during the time of Bonnie and Clyde – and he was once robbed by them while he was asleep in his truck) – He taught Connie how to read a road-map and its a skill that she has embraced!
On Friday morning – that’s today – the day after the 4th of July 2013, when I got to my office, Steven Crevar has sent me an interesting article that made me think even more about money, maps, and life. Steven gave me permission to repost his article along with a few of my own thoughts. If you’re like me – and Aunt Pat – and you prefer to use your iPhone app to listen to a #Podcast – click on the little link above.
Behavioral Finance and Neuroeconomics
One of the most overlooked but growing topics in overall personal financial planning is that of Behavioral Finance also known as Neuroeconomics. According to Finance-Dictionary.com, Behavioral Finance is best described as, “a theory of finance that attempts to explain the decisions of investors by viewing them as rational actors looking out for their self-interest, given the sometimes inefficient nature of the market.”
In simpler terms, the field tries to explain why people act the way they do with money and why they make the financial decisions they make.
Reading Between the Financial RoadMaps
Recently, I had the task of driving family members to the bus station so that they can head out on a road-trip which would take them a few states away. Before I sat in my car, I realized where I had to go and entered the address into my navigation system and clicked Start. Once everyone and everything was in my car, I proceeded to start on our thirty minute journey.
Taking this trip many times before, I already knew I was going to use the middle lane on the highway I was traveling on since it best fit my driving style; not too fast and not too slow. About five minutes into the trip, I noticed a driver coming up fast behind me, then passing me on the left (the fast lane) and then proceeding to cut over three lanes into the right-most lane (the slow lane) in order to avoid all the traffic and from what I presume, get to his destination faster. I also noticed at the same time that he was very upset, frustrated, and purely disgruntled with the way traffic was moving; even though it wasn’t that crowded to begin with. Beating his fists on the steering wheel, yelling out the window at other drivers and flipping people off, he continued his style of driving by switching lanes to find the next empty spot. Not wanting to be anywhere close to this driver, I slowed down a little bit and tried to put as much distance between him and I. Now that I was not worried about the other driver, I relaxed and enjoyed the rest of the ride while talking with my family about their upcoming trip and enjoy a few laughs between.
Coming up on the town where I’d be dropping of my family, I took a quick look in the rear view mirror and to my surprise I saw the same “lead-foot” driver from before. This time, his face looked drawn-out and beaten. He seemed as if he finally succumbed to the traffic and just dealt with it. His behavior was noticeably different.
Trusting Your Financial Navigation System
So how does this all tie in with investing? Let’s start from the beginning. In creating a financial plan, you must start with a goal. Mine for instance, was to drop off family at the bus stop. How I was going to get there I had no idea. But I consulted with a trusted advisor, my navigation system. In investing, you must start with a goal so that you know WHY you’re investing. Not knowing why can lead you to make risky decisions because any strategy or product can go and be deemed right. When I consulted my navigation, I did so because even though I drove this route many times, I wanted it active in case of heavy traffic or delays and so that the navigation can offer me other options or routes to get me to my destination.
Also, in investing, it’s always prudent to create and follow an Investment Policy Statement (IPS). Like a navigation system, an IPS is written directions on paper that you will follow on how to invest to reach your goals. If life changes such as having children, receiving a windfall or experiencing a disability, an IPS can and should change. The navigation and IPS are both directions on how to reach your goal.
On the ride down, the erratic driver I witnessed can be compared to the average investor; generally speaking. The driver (average investor), kept switching lanes (investment strategies) to find the best lane (investment portfolio) to reach his end goal. The left lane or aggressive portfolio is used by investors who have a high tolerance for risk. The middle lane or moderate portfolio is for people who have a medium tolerance for risk. The right lane or conservative portfolio is for people who have a low tolerance for risk. The driver kept switching lanes (portfolios) and was literally chasing the best option for getting to his goal. Each time he switched lanes, he looked at historical data, such as seeing there are no cars and soon realized once he was in the lane that he needed to switch again. The whole drive down, the driver seemed very upset. He kept trying to find the best “portfolio” and by trying to beat the “market” (traffic) he actually ended up behind everyone.
With investing, like driving, becoming erratic with your decisions can lead to sub par results.
Self-Imposed Financial Stress
Another aspect of this overall experience which is very hard to quantify is the amount of stress this driver put upon himself. As I said before, he was shouting and seemed very irritated the whole way down. For health reasons alone, being at this high level of stress for an elongated period of time can cause hazardous effects to your health and can lead to dire outcomes. An investor, even though his goal should be to increase the assets in his overall portfolio, should not look at his portfolio on a daily or weekly basis and worry about each speed bump that he encounters. Driving and investing should be looked at through a “telescope” and should be practiced through long-term time horizons.
Powered by Your Financial Guts and Instincts
Driving and investing are both highly regulated by our individual behaviors. Two people can go through the same situations and experience two different journeys. When investing, we must act with our minds and not our gut instincts. Investing requires self-control, self-realization of ourselves and most importantly the knowledge that driving and investing is performed to get from Point A to Point B and the time in between should be spent nurturing our relationships and other aspects of our lives.
When driving, start with a destination, map out your route and enjoy the ride. When investing, set a goal (i.e. buy a house, pay for college, save for retirement), create an IPS and once that’s all set, enjoy your life with friends and family and don’t worry about the daily noise all around you.
Why You Need a Financial Gyroscope
You and I live all day, every day in the culture of self-indulgence. If we’re aware of it, we can do something about it. From my own experience, I’ve learned that living a life without a transcendent purpose is a dead end street. Santa Claus isn’t going to bail us out, and there’s much more to life than barely making it each month or living in fear that no amount of money is enough.
For most of us, living a life of purpose will require some adjustments. The question is: Is it worth it? For me, the answer is emphatically “yes!”
I’m still tempted by those messages that I deserve the newest this or the best that, but I’m far more aware of those messages today, so I can more clearly see the choices. Over the past decade, I’ve been reorienting my life according to the purposes that challenge me and fill my heart with gratitude. As I’ve looked beyond my own selfish needs and tried to meet some of the needs of those around me, I’ve seen God use me to touch a few lives—and that both humbles me and thrills me. Sure, I could work harder and make more money, but I’ve gradually become deeply convinced that there are things more important than a little more money.
In his book, The Call, author Os Guinness described the powerful, clear sense of purpose in the lives of the Puritans as an internal gyroscope that kept them on track no matter what was going on around them. That’s what my purpose is becoming for me.
Someday, each of us will receive a report card of our attitudes and behaviors. You and I have been given great wealth in time, resources, and abilities. Jesus once remarked, “Great gifts mean great responsibilities; greater gifts, greater responsibilities!” (Luke12:48) If we squander those great gifts on meaningless things, we’ll regret it now, and we’ll regret it even more when the report card comes out.
Steven’s article next month: Mutual Funds and Dunkin’ Donuts: How the Drive-Thru Experience Can Help Your Investment Portfolio.