Bicycle Moto Cross!
When I was 18 years old, I moved to Southern California. My primary motivation was to compete as a professional BMX racer. I had a friend that lived in San Clemente, and at that time, Orange County was the Mecca of BMX racing. Southern California has great weather, which means you can ride year-round and, back then, Sothern California was home to some of the best riders in the world and some of the best BMX tracks and trails. This was the place to be if you wanted to be something in the world of BMX.
My friend and I were dedicated. We’d train twice a day, travel around the world to compete, and even kept a strict diet. I remember having a few signs in the kitchen that read, “Eat For Fuel, Not For Taste.” I can chuckle at it now, but this mantra kept us on track.
We had a clear objective – win. We knew that our competitors were dedicated too, and we were looking for any edge we could obtain – train a bit harder than the next guy, eat a bit cleaner, and maintain a strong appetite/desire for winning. These edges made all the difference.
Sure, every now and then, we’d get a craving for a brownie or a bowl of ice cream, but our objectives were a greater priority than our cravings. Adjusting our eating habits, and having the discipline associated, was a small price to pay on the journey to becoming a champion. Food was fuel.
Cravings & Objectives
In life, we are constantly faced with this dilemma between submitting to our cravings or striving to achieve our objectives; objectives and cravings are often in opposition with one another. When I was racing, this meant I passed on dessert because my aspiration to be a champion was more important to me.
We can apply this truth to something as simple as going grocery shopping. It’s probably not a good idea to go grocery shopping when you are hungry because your appetite and cravings will dictate your purchasing decisions. And it is just as important to bring a grocery list so that you have your objectives (what to buy) clearly spelled out.
Having clarity around your objectives and prioritizing these objectives over your fleeting cravings are two key success principles.
We can also apply this truth to personal finance. As we talked about last week, it is key to have this marriage between your financial plan and your investment portfolio. Your financial plan lays out your financial objectives, and your investment portfolio is the diet that’s meant to help fulfill those objectives. The more descriptive and detailed your plan is, the more concise and intentional you can be in your portfolio’s design.
Food cravings are obvious and familiar to us, but what about financial cravings?
When we don’t have a plan spelled out or a list of financial objectives outlined, what drives our investment decisions? If left to our own devices, we tend to crave or show interest in whatever is trending. If we are extra devilish, we start to crave what we perceive to be get-rich-quick opportunities.
These get-rich-quick appetites seem to be rampant right now.
A Growing Appetite
Financial cravings are a lot like Chinese food; the more you indulge, the greater your appetite gets. It’s that comical reality of being more hungry after you partake in a Chinese feast – it may be mental, or it may be the MSG, regardless it’s often a reality.
Let me add a bit more color to what I mean by this. Let’s assume an investor builds a straightforward portfolio – 50% cash and 50% stocks. This fictitious portfolio’s design is well aligned with our investor’s financial plan, and this allocation helps to meet their short-term and long-term financial objectives. Two years into this strategy, the investor is finding themselves disappointed in how their cash has performed and enamored with their stock allocation’s short-term success. What’s the natural reaction? Throttle up the stock allocation with funds from the cash allocations. This is not driven by a change in objectives or an update to the financial plan, but rather a craving to partake in more stocks because of the recent tasty outcomes.
A Timely Discussion
This topic we are discussing today is evergreen, but my choice to write about it this week is intentional. I have been getting an increasing amount of inquiries lately to uptick client portfolios with a bit more equity exposure. For some investors, this conversation is needed, and the adjustments are prudent. For others, these changes are divorced from one’s financial plan’s objective, and it’s just the reflection of a current craving.
These cravings are not a surprise, though, and this is just how markets work. Markets tend to take three steps forward and one step backward… or one step backward and three steps forward… or one step forward, one step backward, and then two steps forward. This all depends on where you measure from or where your entry point is. Markets are constantly recalibrating themselves, and much of the overvaluation or undervaluation is driven by different forms of each of the extremes of fear and greed. Enthusiasm leads to euphoria, and pessimism leads to despair. These extremes are what drive the volatility within markets.
And what’s the ultimate driver behind investor’s attitudes toward stocks? Recent performance. Over the last 11 months, coming off a market bottom on March 23, 2020, the markets have been on a historic run. The consistent and stellar performance is the MSG of investing that leaves investors wanting more.
Here’s the reality, there is an inverse relationship between investor appetite and enthusiasm and future market results. Investors tend to be the most bullish at the peaks and the most bearish at the troughs. This is why stocks’ consensus appetite can usually provide a contrarian indicator for what to expect in the short term.
What I Am Saying, What I Am Not Saying…
We’ve seen markets rebound off of an aggressive and deep downturn that kicked off this COVID season about 12 months ago. So, am I saying that I believe this recovery is losing steam? No, I actually have no idea of what the short-term future results will be for the market.
AND my prognostications around a forecast would be useless for two reasons (1) they’d be a shot in the dark and not reliably accurate, and (2) for a long-term investor; the short-term results are meaningless.
Let me explain why these short-term results are meaningless. Have you ever been to the Leaning Tower of Pisa? If you have, then I am sure you have seen the rows of tourists taking the comical photos of someone holding up the tower or pushing it over. They take these photos a couple of hundred yards from the actual tower because, from that viewpoint, the person being photographed is as big or bigger than the tower. Is the person actually bigger than the tower? No, but the way depth perception and perspective work, you can create the illusion of the two (the person and the tower) being the same size.
This same truth applies to short-term market results. When you are in the midst of experiencing a 20% or 30% market dip, it feels like being at the edge of the Tower of Pisa and looking straight up – it is huge, scary, and daunting, but as you take one step back, ten steps, 40 yards, 100 yards, etc. then the Tower resizes, it shrinks, and you begin to see it relative to the rest of the landscape. Market dips begin to look insignificant when viewed concerning an investor’s entire investing lifetime. I get it. In the moment, it feels impossible to “have perspective,” you feel as if the tower is going to crush you, but this is where an advisor comes in handy to help you refocus and catch your bearings.
Again, knowing that markets take steps forward and backward in a sequence and rhythm that we can’t predict, we can conclude it is less about timing the market and more about building a plan and portfolio that matches your objectives. I am saying that you should be careful about not constantly recalibrating your portfolio’s design based on your current cravings.
Remember, “Eat For Fuel, Not For Taste.”