It has been wisely said that the person we are today is the result of all the decisions we’ve made up to this point in our lives. And the person we’ll be tomorrow will be the result of all the decisions we make today. The decisions we have made during our lifetimes have a way of eventually coming home. Rush Limbaugh was a heavy smoker early in his life. Nobody made him smoke. He enjoyed it, though he quit smoking long ago. But he recently revealed he has stage four lung cancer. I doubt he was thinking, back when he was smoking cigarettes by the pack, that his 68 year old body would be dealing with the disease he has now. If he could have looked into the future and seen the havoc that habit would wreak on his future, do you think he would have ever started it? Probably not!
So how do we determine, today, if we’re making good decisions? We often evaluate the quality of our decisions based on its outcomes. If it was a favorable outcome, then we usually figure it was a good decision – and vice versa. But that, I believe, should not always be the case. How do we make our decisions? We usually make them based on our knowledge, our past experiences, our future expectations, and most importantly, our emotions. No matter how good we are at that, we still must deal with the fact that most outcomes are also subject to something called randomness. Remember that word! Because of this randomness of outcome, good decisions may produce undesirable outcomes while bad decisions may produce good outcomes.
Since this is an editorial about investments and retirement, that’s what I’ll use for my example. Imagine a seventy year old decides to invest 20% of his retirement portfolio in a highly volatile tech stock on January 3, 2020. He purchases the stock at $445/share. He sells it a month later at $780/share for a hefty 75% gain. Not too shabby for a one month return. So, was this a good decision? No. It was a fortunate outcome, but not a good decision.
How about the retiree investor who has maintained a diversified global portfolio over the last 20 years that stayed in line with his moderate risk tolerance. Was that a poor decision? After all, he would have done much better had he invested it all in US stocks. Even though it was the right decision for him, he still may regret having invested in that diversified portfolio, thanks to the bias of hindsight.
However, since we make decisions looking forward (with the benefit of hindsight), the quality of our decisions should be based on science; in this case the science of probability. Now listen to this next sentence, for it is the whole meaning of this editorial wrapped up into one statement. This is it! We can improve the quality of our decisions by increasing our probability of desirable outcomes. While that statement is true and profound, investors often, though, take this too far. They want the strategy they adopt to guarantee them that desirable outcome, and they want confirmation of that every single day. That is one reason why investors are influenced to avoid every downturn. They don’t see that in the process of investing, we will experience loss at times – that is part of the process.
For many investors, they determine the quality of their decisions and success in investing only by their return up to the day they are currently looking at. Their evaluation of their portfolio is based on the short-term, and the short term is fraught with randomness. Remember that word; RANDOMNESS, for it is very important. With real equity investments we get randomness in spades in the short term, but our job is to eliminate randomness in the long term. How do we do that?
Well, the best decision makers share the following two qualities: they have excellent processes and professional judgment. That’s why the Risk Tool in our Wealth Toolkit is so important to our clients. It gives them a tested and proven process for making prudent decisions. Once they have the process for making good decisions about their portfolio, the most successful investors cultivate two more characteristics: discipline and patience. They evaluate their success as investors based on the patience and diligence to the process – even when that process is out of favor. So, over the term of a possible 30 year retirement, the key to success is not finding just the right stock or mutual fund, or giving up and choosing a low-return annuity. No, the real key to success is having a process for making good, long-term decisions, refining your process along the way, and then having the discipline and patience to let it work.
There are many and varied ways to build your own process for your own personal investment success. Here at ProVest Wealth Advisors, we have developed such a process using the risk tool in our trademarked Wealth Toolkit, and the tremendous amount of research we purchase and receive on a daily basis. We have refined our process over many years, and we continue to refine it because no investment process is perfect. So if you haven’t yet defined your own personal process for investment success, give us a call at ProVest because ours is pretty good. You can reach us at 800-277-0025.