What Driving Styles Can Tell Us About Investing
Don’t be that Guy!!
You’re driving down the road on your way to work or out-of-town for the weekend and you spot the quickly approaching car in your sideview mirror. You’re driving safely in the right lane while he seems to be swerving in and out of traffic, dangerously changing lanes, jockeying for the next empty space just so he can get a little further ahead. You’re practicing good defensive driving techniques while this impatient driver is cutting in front of people, only to gain a few seconds. His hazardous moves annoy you and fellow drivers and puts everyone around him at risk. What does he really gain for all the peril he has taken on and what emotional state has it left him in?
So how does this relate to investing? Unfortunately, there are impatient investors who take the same “driving” approach. Paul Merriman describes it well:
“Impatient investors often watch the market like hawks. They want results, and they want them now. Impatient investors are easy prey for the investment industry. They can be lured to change lanes, then change lanes again, always seeking a competitive advantage. Unfortunately they often wind up as ‘roadkill,’ retiring to the shoulder of the road with their capital in money market funds while their more patient counterparts build wealth in the slower lane.”
In contrast, the steadier approach that patient investors take often allows them to stick to a plan, sleep better at night, and meet their financial goals. They’re keenly aware of the emotional enemies of investing: fear, greed, impatience, and frustration. They further know that when one is operating in fear, fight or flight chemicals flood their brain and their critical thinking skills shut down.
Knowing their emotions are a very poor guide, prudent investors don’t rely on Wall Street or the media. Wall Street promotes optimism and wants you to be a frequent trader; they want you to believe that higher returns are just a transaction away. The media partners with the financial industry to create anxiety in you. They keep your attention for their advertisers. How? By promoting what’s “new, better and/or exciting.” At times, they quote interpretations or guesses as fact. Hence, the erratic investor often “changes lanes” and buys the latest “hot stock” or succumbs to a salesman’s pressure, just because he recently underperformed some popular index. (See Mark Brinser’s Investing Principles from a Mountain Bike Lesson article for a further explanation of this.)
Patient investors rely on their intellect and the help of a competent advisor. This “co-pilot” or “wingman” works in partnership with them, providing accountability, objectivity, and helpful education. They help create an appropriate plan and make changes to it based on legitimate life transitions.
These investors may even “drive” (invest) an automatic: automatic savings, automatic investing, and automatic rebalancing. Setbacks and a turbulent stock market don’t make them get out of their investments. Only an objective non-emotional assessment of the data should drive changes to the allocation. They are willing to wait years, even decades, to reap their rewards.
So don’t be “that guy”: neither the perilous driver nor the erratic investor. Patience and persistence in both driving and investing can greatly improve your chances of getting to your destination safely and more relaxed.
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