Image courtesy of Jack Butcher - Follow his work on Twitter @VisualizeValue
Investors often put the performance cart ahead of the decision process horse. This is the path of least resistance since most advisors don’t offer clients a look under the hood. Most investors don’t have the transparency, engagement, time, or curiosity, to learn about the decisions in their portfolios. They do see the result, based on how their portfolio has done.
This result oversimplifies the decision made and masks the quality of the decisions, leading to the wrong questions and miscalculated judgements. This mindset can make you think that running a red light is a good idea. Bad decisions can have good outcomes due to luck. The converse is also true.
The ideal decision tool is one that creates the most gains, with the least risk exposure. This result may not be as robust as one that just seeks the greatest gain. It is also accompanied with the criteria that would be needed to change the decision that affects the portfolio.
Without context, results can be perceived as sub-optimal, even though it was the best decision in a world with several potential outcomes. More importantly, it doesn’t allow you to have the deep, quality conversations with your advisor about what he is doing and why, and how that is considering your best interests and your unique circumstances.
There are several decisions in Financial Planning that go beyond your portfolio, that you have a lot more control over...finishing your estate plan and increasing your contributions are not a function of an Elon Musk tweet or a pandemic.
Some people need to have a narrative for every bump in the market which contributes to this outcome mindset, because we want to rationalize every market move so it feels less random. The problem with that is that there are a lot of decisions that are contributing to one outcome you experienced, not all the possible outcomes that could have just as easily happened. This is the element of luck.
Developing the discipline to distill result quality from decision quality can help you determine what decisions to continue to pursue and which ones to re-evaluate. This approach is less dependent on one’s ability to predict, and more about building a responsive, adaptive, and resilient approach to portfolio management around decision making.