The Individual Investor’s Plight: Trust Your Equipment

Last week, I had to chaperone my son’s sixth-grade class on a trip to an environmental learning center. One of the activities was climbing 30 feet in the air and navigating a ropes course amongst the treetops. Finishing with a zip line was exhilarating. But before we even went up, the instructor spent a lot of time on our safety equipment. He wanted the kids to feel safe and trust their equipment so that they could forget about that part and focus on overcoming their fears. It struck me that all of us need to trust our equipment a little more in life.
We all listen to reports about how Wall Street, hedge funds, big investors or even endowments invest their money. The assumption is that they know what they are doing, so we should follow their lead. Carl Richards recently talked about why individual investors should not invest like Harvard, pointing out that each of us does not have $32 billion and cannot invest 10% ($3 billion) to alternative categories that require that level of capital to access. Most important, individuals do not have the same research and resources as Harvard (or any big investor).
Getting caught up in the excitement of a story should not be the reason to make an investment. Most people will not spend the time and money necessary to research investments. Nor are they able to call the CFO of a company and ask him pointed questions. That is okay; individual investors should be willing to accept that there are certain investments that they should just not worry about. Once you accept that there are many investments that you should not be in, usually because you fundamentally don’t understand them, then you can move on to the thin slice of investing that you can understand.
I am not suggesting that one size fits all when it comes to investing. I know plenty of people who invest in individual stocks and eschew mutual funds because they have the time for the research (and the reverse is also true). Others might really understand the underlying assumptions of a particular annuity contract or hedge fund and how that helps them in their goals, while many will not. The key is to understand which of these people you are. I would argue that simplifying is a better answer than adding complexity. But once you understand how much work you really want to put into the investing equation, it is time to trust your equipment.
Trusting your equipment is the hard part because we are prone to second guessing. Yet questioning your equipment when you are 30 feet in the air is the wrong time to do it. The biggest mistake I see people make is buying an investment today for a well-thought-out goal milestone b requirements years down the road, and then second guessing that investment in a month when some short-term news comes out that shakes their confidence. Good equipment should always be checked when you are on the ground, but not when you feel the most vulnerable in the air.
Without getting into the exact investments I consider good equipment, I will default to a couple of simple ideas. Use an investment policy statement (IPS) that lays out your investment strategy so that when markets do get rough you can go back to something you wrote when you were calm. Ease your mind by keeping investments simple by focusing on costs, taxes and liquidity (not necessarily cash liquidity, but instead the ability to change your mind and get out of something).
That last point, liquidity, is part of the issue. I always suggest that you invest in something that allows you to change your mind should your goals change. This concept alone will software product management certification keep you calmer since knowing you can change something might be enough of an escape hatch to allow your mind to overrule your emotions and stay invested when markets are in turmoil.
Trusting your equipment only happens when you have the time to focus on the details of that equipment. If I know each carabiner can hold 5,000 pounds and I am able to see it locks correctly while on the ground, I will probably not worry about that issue when I am in the air. With the markets generally up for the year, now is a good time to review your equipment in your portfolio and decide if it is trustworthy for the years to come. Doing this when you are calm will help you to be a better investor when you are not so calm.

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