I have been a professional investor for the last 13 years and ever since I was first exposed to the idea that your money can make money in college I have been absolutely fascinated by investing. In fact, I am always trying to look at things that are happening around me and find ways to invest and make money off of these trends.
Investing your hard earned money can be a roller coaster of emotions. Having the privilege of managing other people’s money I get an in depth look at how people react to the ups and downs of the market on a daily basis. Given my obsession with not only investing, but getting clients to understand and make better financial decisions has really driven me to make comparisons to real life scenarios. By making these comparisons, I hope to invoke a similar feeling that one has experienced in their life and illustrate how investing can draw similar feelings so when those feelings arise in their finances, it is not as scary and they are better prepared to handle it.
So what does all of this have to do with traffic jams? There is no doubt in my mind that every single person reading this has been in a traffic jam at some point in their life. In fact, most of you have probably been in one prior to GPS where you had no idea how long or how far the traffic jam was going to last. Imagine how frustrating that must have been!!!! Just like there are different types of investors, there are different personalities that handle a traffic jam. We will talk about each person and how they would most likely invest and what changes they can put in place to make themselves a better investor.
The Weaver – If you have ever seen the movie office space, the opening scene where Peter is stuck in traffic on his way to work is the perfect example of The Weaver. You can watch that scene here if you haven’t seen it yet. They try to stay on the same course, but feel like they may gain an edge by moving back and forth between lanes. Many times however, after you switch lanes you notice the lane you were in is now moving faster than the one you switched into. Then you switch back just to have the same thing happen again. This type of person puts in a lot of effort and work and in the end they could be slightly better or worse than if they had just been patient and stayed in their lane. In the process, the weaver spends a lot of energy and frustration making switching lanes.
Now this same person that tries to weave in and out of traffic does the same thing with their investments. They continually buy and sell stocks and switch strategies away from underperformers to outperformers only to see the fortunes mean revert and then they switch back again. This type of behavior is part of who you are as a person, and many times the weaver doesn’t even realize what they are doing.
In most cases, you are not going to completely change a weaver, so the best way to combat these urges is to consciously segregate accounts. What I mean by this is to take a small portion and let the weaver trade, churn, switch, and game as much as they want. With the rest of the money it should be the complete opposite in an index fund that is the Ron Popeil of investments, “just set it and forget it.” By doing this, you can balance out the natural urge for too much action, while still reaching your destination.
The Course Changer – The course changer is similar to a weaver, but they decide to take an entirely different route all together. This is the person that believes they have some shortcut, or special way, that is going to get them around the traffic and to the destination faster than just sitting there. Now, in the old days, this type of person either planned alternative routes before leaving, or traveled with a handy atlas to consult at a minutes notice. Today, anyone can be a course changer by simply looking at the car GPS or whipping out their smartphone. The biggest problem with this type of person is that they believe they know something that no one else does. The course changer is thinking, I’ll get off at the next exit and take backroads for the next 10 miles and then get back on the highway after the traffic. What they don’t realize is that everyone else in the jam has the same GPS and tries the same route only to realize that this road is filled with stop lights. Similar to the weaver, there are times when it works and times when it doesn’t, but the belief is always that the next time will always work out better.
The course changer invests in a similar way. In fact, you probably know someone that invests like this. They hear a stock tip on tv or hear a rumor from a buddy who heard something from his cousin sal about a new technology that will be the next Google. Because they believe they have information that no one else has, they make the investment without doing proper research and hope for the best. They then proceed to watch this investment on a minute by minute basis to see when this tip becomes public knowledge, thus making them rich and validating their source. The problem is that if that hit never comes, the course changer quickly moves to the next investment.
The best thing for a course changer to do is limit the amount of tip or gut investments. Just by statistics alone, some of those tips are going to pan out and some are not. This is important to know because the course changer will tend to attribute the success to good information and the failure to bad luck. It’s not!! It’s all chance when you invest this way. The best thing to do is limit your gut investments and balance these with a diversified portfolio.
The Auto Pilot – The auto pilot is someone that is patient and figures there is nothing that they can do to make things better and that they will get to their destination when they get there. They stay in their lane and wait for things to clear up ahead. Even if a lane opens up or there is an earlier exit, they will stick to the script for fear of the unknown and having a great deal of comfort that they spent a lot of time mapping out their route beforehand and that no matter what it will still be the best route. Just like the other personalities, sometimes it works and sometimes you would be better off trying something different.
The auto pilot invests in a 401k and Index funds. They pick an allocation, make normal contributions, and never review or evaluate how they are doing. The problem with this view is that this investor can miss big opportunities to change allocations and move from outperforming/overvalued investments to those that are undervalued.
The best thing for an auto pilot to do is to force themselves to review their accounts on a periodic basis. Because they are adverse to change, reviews should be set at longer intervals such as 12 -18 months. Any less than that would be too much review for an auto pilot which may get them to ditch the reviews all together. Additionally, they can add some private investments or active funds to give them other exposures and potentially help long term returns.
Next time you get stuck in a traffic jam, take note of how you react. Your reaction will tell you a lot more about your investment traits and your risk profile than a standard risk questionnaire that you get from your broker or financial advisor. Once you realize which personality you are, you will now be armed with an important insight into how you will behave and what to do about it when your portfolio hits the inevitable traffic jam. Knowing your tendencies and how to balance those tendencies will allow you to make better investment decisions in the long run. At the very least, you can pass the time in that traffic jam by pointing out and picking on all of the weavers, course changers, and auto pilots that are around you.
Safe travels and happy investing to all.