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I hoped it wasn’t true that “objects in mirror may be closer then they appear” or this pickup truck would have been in my back seat! The driver was clearly in a hurry, and unhappy that I was between him and his destination. I could see him screaming and cursing in my mirror while his truck swerved left and right in search of a way around me. I don’t know what he expected me to do. The speed limit was 55 miles per hour and I was already humming right along at... 50!? Oh no. I had turned into my father.
Dad was that guy who just scooted along at 50mph wondering why everyone else seemed to be in such a big hurry all the time. He lived his entire life without ever receiving so much as a single traffic ticket. This was not me at all, as a young man. If I took my eyes off of my speedometer for a few seconds my vehicle would ease its way up to 70-80 mph before I knew it. By the time I hit the age of forty though, the needle seemed to move in the other direction and my car seemed to slow down on its own. Here I was...driving like dad.
This got me thinking that people are the same way with money. If I never looked at my budget or tracked my spending, eventually I would have accidentally saved a good sum of money. If I don’t know if I’m spending too much or too little, my default reaction is to spend less. Unfortunately for many people, their default is to “hit the gas.” Without monitoring their “speed” through regular checks of the critical numbers, they will spend too much. This is where having a spending plan is a necessity.
Having pondered this for a while, I came to realize that there are several driving lessons from dad that translate well into sound financial guidance. Here are three:
Keep Your Eyes Down the Road a Stretch
Most new drivers are guilty of one early mistake. We look just a few feet ahead of the front bumper when trying to stay within our lane. Inevitably, the vehicle creeps a little to close to one line or another and we adjust the steering wheel only to find ourselves crossing to the opposite line. This is how it goes for a while. Our early driving is a long series of over-corrections as we bounce back and forth across our lane until someone gives us a little advice. Keep your eyes down the road a stretch. Stop focusing on the asphalt immediately in front of you, but rather look more towards the horizon. Once you do start thinking a little down the road, it is amazing how the next several feet seem to take care of themselves.
Inexperienced investors often do the same thing. By looking at the extreme short-term and reacting to the daily (or hourly) noise coming out of the financial media, they end up moving from one erroneous over-correction to the next. By focusing on personal financial goals and meaningful time horizons, they could have a much smoother ride to their destination.
Mirrors are Useful, But Not as Useful as a Windshield
One time, I was in a side-impact collision while driving through an intersection. Witnesses say that the driver that struck me had just run a red light a block earlier. I confess that I’ve sped up to “race a yellow light” before. I think most of us have. The bigger problem in this example is what we do after we get through the intersection. The natural urge is to check the rearview mirror to see if the light is still yellow or if we failed to “beat the red”. If we do see a red light, we might spend a few more seconds scanning the mirrors for police officers. Not only are we speeding, but we’ve spent several seconds looking behind us and not in the direction in which we are driving. This is precisely the combination of behaviors displayed by the driver that totaled my vehicle.
Once again, this translates into common investor behavior. I can’t count how many times I have seen people trying to move forward using only information about what is behind them. Sometimes this takes the form of “track records” of specific funds, despite the common industry refrain that “Past Performance Is Not Indicative Of Future Results”. Putting aside specific investments, it is also not uncommon for people to want to chase the hot asset class from a recent time period. They seem to think that because something went up last year then it clearly will do the same next year. Sadly for them, history has taught us otherwise.
Investment markets are predictive in nature. Not only are they evaluating the anticipated future value of investments, but they have often “priced in” any likely occurrences that could influence prices either positively or negatively. It is illogical to try to get ahead of a forward-looking market by only seeing what is already in the past. Don’t get so distracted with your rearview mirror that you forget to look through the windshield.
Safety Devices Exist for a Reason
It takes a few seconds to put on your seat belt. If you’re in a hurry, you can get to your destination a few seconds faster if you didn’t bother to strap yourself in before you start driving. You can get there even more quickly if you exceed the speed limit and ignore every stop sign and red light along the way. If your goal is to get somewhere in the shortest amount of time possible, then each of these shortcuts can make you more successful at achieving that goal, but that doesn’t make any of them a good idea! That seat belt, those traffic signals, and that speed limit all exist to maximize your probability of getting to your destination unharmed, even if that means getting you there a little bit later.
In every rising stock market, there are always plenty of people asking “why am I so diversified?” It may be true that a pure equity portfolio will outperform a diversified portfolio over time, but only if the future looks like the past and you don’t make any “driver” errors along the way. There are many investment approaches that could result in slightly lower returns in a red hot market. These may be things like active management (versus less expensive passive approaches), alternative investments, or tactical strategies. The reason these exist, much like your seat belt, is to make sure that no matter what happens along the road, you have the best chance of surviving it.
Conclusion
With Father’s Day around the corner, I guess it is only natural that I reflect on some lessons that I learned from my dad. He was never a big talker, but always a great example of how to live a good honest life. I could write a book of all the lessons I distilled from years of observing him (and maybe I will someday), but for now, I am glad to share just a few.
Thanks for reading. Enjoy Father’s Day.
Related: The Good News We Need (Found Through Human Experimentation)