I talk with clients about Money as a function of their Behavior, their Expenses, their Risk, and their Taxes over time. Danessa Knaupp in Naked at Work: A Leader’s Guide to Fearless Authenticity eloquently simplified this with what she learned from tennis instructor Tim Gallwey.
Performance = Potential - Interference
Interference can be internal or external, real or imagined. ~ Danessa Knaupp
This holds true for your wealth and your investments. External interference can be taxes or a pandemic. The stories I get from my clients surrounding this pandemic aren’t about money.
Postponed weddings Cancelled vacations
Impact to their small businesses Virtual graduations
Rescinded job offers Constrained Healthcare Access
These are painful experiences, but the pandemic has allowed us to experience unique and unexpected adversity. However, they have also afforded us to be human and authentic...to let our guard down collectively to connect.
These stories are shareable because there is no blame and there is no shame.
Internal interference is often described in the financial world as fear, envy, or greed. The interference I want to focus on today overlaps with the behavioral aspect of money. Danessa confronts what many of us won’t publicly or even reflect on to ourselves...shame.
Past performance is not indicative of future results is something that holds true for real assets. However, shame is a certain cost. It is an emotional tax on your investments.
We pay the cost of shame in installments over time. - Danessa Knaupp
The reason your neighborhood Facebook page or Next Door membership has lots of people looking for plumbers, electricians, and tree removal is because there is no shame involved. Issues happen in all of our houses. It’s transactional.
However, you rarely see someone looking for a financial planner because money invokes a feeling of shame, either because you need a financial planner because you are struggling OR you had a failed relationship with another planner. Even when this isn’t so, you are letting everyone know you have a money issue. It’s a perceived admission of defeat. It’s personal.
The reason we hold on to a stock that has lost 80% of its value is because it is an admission of defeat. It’s a type of shame.
My business integrates investment management and financial planning by being evidence-based, process-centric, and behaviorally sensitive. Thanks to Danessa, my epiphany on the role shame plays in attracting new clients and overcoming behavioral challenges with existing ones is simple. The perspective that I can offer may not be to offer something new, but more importantly, to remove what’s in the way.
Shame focuses on the precedent of past performance, like in the Great Financial Crisis.
Shame paralyzes because of the fear/admission of failure and rejection, and the potential of future shame.
Shame has a cost, both past and future. Avoiding shame creates an illusion of control.
Rejection—and the fear of rejection—is the biggest impediment we face to choosing ourselves. - James Altucher
I have seen the stock market misbehave...a lot. I have seen the links between market performance, economic data, and political affiliation result in laughable forecasts vs. actuals.
One concept we discuss in investing is “regret minimization”. To do this effectively, it means to understand what amount of stock market exposure is required vs. desired. That gap can produce regret, but with proper awareness, it can prevent shame.
Maybe the financial planning needs to confront shame as boldly as Danessa. Shame minimization would likely lead to better active decisions. Daniel Crosby in The Behavioral Investor offers this:
Conservatism status quo boils down to regret aversion - one would rather lose with inaction than have the possibility of winning. A rules-based system is the best way to avoid the paralysis between these two paths.
Danessa introduces the concept of getting lost on a venture and you come to a map that says “You are Here”. It doesn’t say “You were here” or “You should have gone that way”. It affords you the opportunity to do a course correction and back on track. Often your memories are stories that simploy need to be re-assessed and re-framed.
James Altucher builds on this point with this:
Most people obsess on regrets in their past or anxieties in their future. I call this “time traveling.” The past and future don’t exist. They are memories and speculation, neither of which you have any control over. You don’t need to time travel anymore. You can live right now.
Advisors should look at new opportunities and circumstances as a chance to say “You are Here”, and let me be the Mountain Guide who can get us where we need to go and not let them bring shame in their backpack.
Stocks in an investment portfolio shouldn’t be bought with the currency of shame. Shame is an imaginary debt that can slow growth in yourself and possibly in your investment portfolio. Stock market behavior combined with emotional investors with memories of uncomfortable losses can lead to “shame inflation”. A portfolio should be built about choosing your authentic self rather than having the markets choose you.
Good news! You can create a new story and portfolio for yourself. Building a portfolio with assets that work closely with others, while accepting vulnerability and risk is authentic investing. You can choose if investment risk is a rational temporary setback or if shame is a permanent part of your asset allocation.
Footnotes:
(1) Tim Gallwey was a point of focus on Michael Lewis’ podcast “Against the Rules” - Season 2, Episode 3
(2) Danessa had a recent discussion about her book on the Suburban Folk Podcast, Episode 37