Let’s face the facts. Nobody likes to be called emotional. Nobody likes to be told they are acting irrationally. As Rory Sutherland in his book Alchemy says,

“When we do put a name to non-rational behavior, it is usually a word like ’emotion’, which makes it sound like logic’s evil twin. ‘You’re being emotional’ is used as code for ‘you’re being an idiot.'”

But investing exists in a world full of emotions because in most cases, we are dealing with our life’s savings. It’s not exactly the same type of emotions my kids feel when somebody calls them a ‘dummy’.

But it’s hard to act rationally in a market that acts irrationally in the short-term. We know that markets are rational in the long-term, but they always seem irrational in the short-term.

Adding to the problem, the media focuses exclusively on the short-term where everything is unknowable and irrational, but they talk about it as if it’s entirely predictable and knowable. They live in the short-term and never speak about the more rational, more historically predictable time frames.

When is the last time you heard a pundit say, “Over the next 10-30 years, I expect this to be a good trade.”? Never. If they did that, their viewers would turn off the TV and get back to whatever they should have been doing in the first place.

But because the media only talks about the short-term, it encourages us to assign a seemingly logical reason why the market is acting irrationally in the short-term. This causes us to feel like we’re acting logically by extension when we make a reactive trade to calm our emotions.

But the truth is, rational long-term decisions cannot be made based on short-term irrational market movements.

Again from Sutherland,

“The drive to be rational has led people to seek political and economic laws that are akin to the laws of physics - universally true and applicable. The caste of rational decision making requires generalizable laws to allow them confidently to pronounce on matters without needing to consider the specifics of the situation. And in reality ‘context’ is often the most important thing in determining how people think, behave and act: this simple fact dooms many universal models from the start. Because in order to form universal laws, naive rationalists have to pretend that context doesn’t matter.”

Context is everything. For example, we are all “long-term investors” during bull markets. It’s when everything goes to hell that we begin to second guess ourselves and our entire portfolio strategy.

Behaving properly is easy in a theoretical or academic setting. It’s in the real world where we all get into trouble. This is why I believe almost all risk questionnaires that assign a number value (or even a name) to a client is a relatively silly way to approach risk.

Everything about investing is about rational vs. irrational, short-term vs. long-term, and emotional vs. acting on a plan.

To the surprise of many, successfully managing a retirement plan isn’t about optimizing every little detail. That’s a distraction. For the most part, successfully managing a retirement plan is about avoiding the major blunder. And almost all major blunders aren’t tactical in nature such as which funds to choose. They are behavioral. And 2020 was the ultimate lesson in this regard.

As always, stay the course.
-Ashby

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