While it’s difficult to overcome the urge to react to unexpected events in our lives, patience and consideration of the facts almost always yields better results than emotional reactions. We encounter this every day, from holding off on hitting that send button on a nasty email you haven’t yet fully digested, to not punching the guy in the face who just said something stupid to your girlfriend.
In retrospect, such instinctive responses that were delivered without considering the full context, the facts and the likely outcomes most often lead to regret and often, financial pain, down the road.
“Storm of the Century”
While the media loves to talk about the “Storm of the Century” every few years to keep eyeballs glued to the set, we actually have had the snowfall of the century this year in many parts of the Northeast.
Well… We have some friends who tend to make rapid, emotional decisions that often have heavy financial implications. Last week, they proclaimed, “We’re moving to California. This snow is ridiculous and we’re not dealing with another winter like this.”
In truth, they probably won’t see another winter like the East Coast has had, but their minds are made up. They’ve already talked their parents into moving out West with them so they can still see the grandkids, and he’s already looking for work.
They’re serious; they’re moving because of snow.
Take a deep breath
Based on my recollections, this winter has been off the charts. In fact, I can recall several winters where we didn’t even have any snow to speak of, perhaps a dusting here or there. So, I looked into it a little further.
As it turns out, we haven’t had this much snow in our region for over 100 years, dating back to when they first started tracking snowfall in 1884. Hmmm… Maybe it was a Storm of the Century. But still… Moving?
What’s the big deal about moving? Well, if snow is the sole catalyst, it just strikes me has highly irrational – and expensive.
- An equivalent house (they have a roughly 3, 000 sq ft new-construction home) in a reasonably desirable area of California is going to cost more than double what it does here.
- California is essentially bankrupt. It’s inevitable that services will be cut while taxes are being raised – and current tax rates are already higher than most states. Is this a place you want to be moving TO? Or running FROM?
- Moving costs are not trivial.
- What if the job doesn’t work out? It’s tougher to find high paying jobs than it used to be.
It’s now evident this wasn’t a typical snowfall season. Since we haven’t had this much snow in over 100 years, it is unlikely that we’ll see something similar anytime soon. This winter was an outlier, pure and simple.
Wanting to avoid bad winter weather is a lot like the understandable, yet irrational feeling of not wanting to drive a car again after a bad car accident, or even people that are afraid to fly even though the trip to the airport is more hazardous than the plane flight itself. While disasters do occur, they are extremely rare, and repeat events of similar magnitude are nearly non-existent.
So, if there’s a once per hundred year earthquake on the fault line which causes damage and fear, will our friends turn around and move back East? This business of reacting to rare events can get pretty expensive!
This brings me to how similar thinking affects investors. Left to their own devices, millions of retail investors damage their prospects for an optimal retirement asset allocation by constantly tinkering with it. In the midst of the financial crisis, friend after friend proclaimed that they were boldly moving all their money out of stocks and into bonds – Treasury Bonds that is.
Many retirement accounts offer some sort of “conservative” bond fund, and tons of people have flocked into such investments. Not only did most of these people exit at the worst possible time – pivot bottom in March 2009, but they then shifted money into a money-losing Treasury fund while stocks rallied over 60% from their lows in less than a year (compare Mar 9 onward)!
If you thought Treasuries could never lose money, think again. With yields so low that investors were actually taking a negative yield just to stay liquid in short term paper, the only direction for Treasuries to move was down (driving yield up). And they did. It was so plainly obvious to me in 2009 that I shorted Treasuries in my trading account with a practical risk-free gain in my book.
So, what you have here is people that initially had a reasonable asset allocation suited to their risk tolerance and time horizon (often 20-30 years from now!) shifting money around at the worst possible time. By deviating from a long-term strategy with short term reactive measures, their nest egg at retirement could be hundreds of thousands of dollars short.
While stocks make people nervous, no responsible financial adviser would propose a 0% stock allocation and 100% Treasury bond allocation for a 30 year time horizon. History has demonstrated that you’re lucky if you even beat inflation over decades long periods of time in Treasuries, while equities always outperform other conventional asset classes over long time periods.
Regardless of what your long term strategy is – be it asset allocation in your 401K, career moves, altering a small business strategy, or whatever the situation may be – before you “go with your gut” and make a major decision based on a single data point, your emotions, or a perceived reality, make sure you consider the context and what the possible long-term implications are.
What are some of the worst “Gut Reaction” moves you’ve seen?