Consider the process, not just results, when making financial decisions
July 14, 2024
The question about whether Joe Biden should step aside in his quest for a second presidential term is interesting because the result of the election won't necessarily indicate the soundness of the decision.
Regardless of the outcome in November, there is no way of knowing whether it would have been different with another candidate, in spite of what the experts will espouse.
We look at results and conclude the decision we made was sound or unsound. But results are never guaranteed, so the process for making our decision matters more than the results. A good outcome with a bad process is simply luck. Your goal should be to increase the chances of making a good decision.
Here are some financial examples:
When you are looking to move, what is the process you are using to make your decision? Are you falling in love with a house? Are you moving to a neighborhood where your friends live? Are you trading a bigger home for longer commutes? There will always be a number of variables that will impact your feelings about where you live, so create your list of the things that matter most to you (as well as what you wish to avoid) and then weigh those items accordingly.
When clients are talking about what they love about their living arrangements, they almost always gush about their neighborhoods, their commutes, their community amenities. They rarely talk about the actual features of their homes, although an ability to age in place seems to eventually become more important. We encourage homebuyers to actually visit neighborhoods before they even look for houses. Check out where you will grocery shop, what other important locations are close to you, which school buses come through the area (so you have a sense of whether kids are going to public or private schools). And take some time to see how this fits for you. It is far easier to fix what you buy than where you bought it.
So you bought a stock or crypto currency, etc., at the bottom a few years ago, and now it makes up 75% of your investment assets. Well, that certainly worked out, but what was your process in making that decision, and what do you do now? We tend to fall in love with successes, attribute them to a great skill that we uniquely hold and expect we can repeat them.
Let's try this thought experiment: You just inherited a bunch of money and walk into your broker's office. She suggests you put three-quarters of your cash into one stock or type of crypto, etc. Would you think, "What a great idea"? Or would you run away and not even bother to validate parking?
A better process in this case could certainly have cost you a lot of money, but more often than not, it would have provided a more predictable outcome. There are several ways to minimize risk with an asset that has appreciated greatly, depending on the size of your (good) fortune:
• You can systematically sell some of it so it doesn't represent more than a reasonable percentage of all your assets (10-20%)
• You can peel off enough of the asset to provide security and continue to roll the dice (yes, it is gambling) with the rest
• You can try to see if there is "insurance" to buy against the position using hedging strategies
• You can gift some of it into a charitable trust to create income
If you are willing to forego your chance of winning the investment lottery, then you can develop a process to match your investment portfolio with your time horizon and accept an appropriate level of risk for your long-term objectives. This thoughtful type of approach means you are more diversified, which provides more consistent returns over time and reduces the gyrations part of all investing.
We won't know until after the election whether the decision President Biden made resulted in the desired outcome, but my vote is for using a sound process to make the decision.
- Ross Levin
This article originally appeared in the Minneapolis Star Tribune on July 14, 2024