Boredom Can Be an Investors EnemySubmitted by Castlebar Asset Management on January 19th, 2017
I just finished Michael Lewis’ new book, The Undoing Project. My copy is methodically dogeared and underlined, but one passage has stuck with me since I read it.
If people thought that a coin, after landing on heads five times in a row, was more likely, on the sixth toss, to land on tails. It wasn't because they misunderstood randomness. “It was because people get bored doing the same thing all the time.”
Sometimes the monotony of a routine can get the best of us. We understand the odds or another way to look at it is we know what is good and not good for us. Usually when we get bored or want to rebel against the odds it is a small choice, like you are too tired to make your healthy dinner at home so you take the family out. It is probably more expensive and not as healthy an option. We understand the circumstances and we don’t care. The impact is small and the consequences are limited. What we want to avoid is a series of small choices or even just a large one that will take us off course because we are pushing back against the odds.
When it comes to financial planning and our investments, most of us have moments when we act irrationally. Our actions may be influenced because of a big sell off or a strong rally in the market. We might bust our budgets because we have been well behaved with money for far too long and it is time to make an impulse purchase. More likely though we just have a craving to make a little bit of a risky or irrational decision because we are bored.
In dealing with our investments we all have a part of us that are risk takers. For some, our appetite may be greater than others. Whether we want to gamble on a few high flying stocks, make a speculative investment in real estate or go for a big home run with a friend on their business, all are high risk investments in isolation. If these one-off ideas are your investment strategy, well good luck! If you take a small fraction, 5% or less, of your portfolio and allocate it towards some against the odds investments it could have a positive effect. Having a small percentage of your investments that allow you to scratch the risk itch and it will accomplish two important things. It will prevent you from getting bored, as well as, minimizing the impact on your long term goals. The key is the other 95% of your investments will keep you focused on your long term goals.
Boredom from doing the same thing all the time is more likely to strike your budget than your investments. Most of us want to stick to our budgets or live within our means, but every so often an impulse or splurge may take us off course. Building in the ability to have a splurge now and again into your budget allows you to satisfy your impulses, but does not kill your finances. Doing the right thing all the time probably will drive us crazy. The key is to build room that an occasionally splurge does not lead to a lifestyle creep issue.
We understand that a coin flip is a 50% / 50% proposition. If a coin lands on heads five or ten times in a row it is fun to think that the streak may continue or the streak must end, even though we know the odds have not changed. Whether we are bored playing the odds or want bragging rights that we took a risk and it went on our favor, we need to allow ourselves to have “fun” but limit its impact on our financial life.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your personal financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.