By Brad Thomason, CPA
What kinds of things do you spend your time thinking about?
It’s a simple question, but one that’s not so easy to answer. As I’m sure you are aware, in the span of just a couple of minutes we can jump from one topic to the next and end up a long way from where we were in less than the time it takes to drink a cup of coffee.
I raise the question though because it ends up being a factor in the mission of planning for retirement income. As we have discussed before (and as you have probably seen from any number of other sources), most people report that they don’t really spend an adequate amount of time thinking about and working on their retirement plans.
I have been interested in the question of why that is for many years. I have developed a degree of comfort with the belief that I will probably never have a complete answer. But I think that one of the factors - a major one, most likely – is that at the end of a typical day, most people are already too mentally fatigued to get in the right frame of mind to make headway on the project. As such, it gets pushed to tomorrow. Tomorrow the same thing happens. Next thing you know, 30 years have passed.
When we go looking for means to bring about change in basic human behavior and the default ways in which our brains work, I’m not sure there’s much to be encouraged about. Someone pointed out a long time ago that we are creatures of habit, and the evidence seems resolute on that point.
But as to the matter of why we got mentally fatigued in the first place though, there may be something we can work with there. I have noticed over the years that there is a category of decisions which people are willing to attack with great vigor, but which in the end, don’t amount to a lot. Being on the lookout for these can yield some big dividends.
I first noticed this set of circumstances back in the days when people still had land lines and there was a great quest to find the cheapest long distance provider. The latter day version has to do with which phone and which data plan. Other versions include obsessing over what kind of car to get, and/or whether to lease or buy. Picking a vacation spot is for some, a strong contender. The fact that Vacationer Planner is now a viable profession tells us a lot about the importance assigned to such decisions.
I think what is going on here is that people see these decisions sitting there, and they appear to be easy as compared to retirement planning and similar activities. People, perhaps unconsciously, do some mental math and conclude that while they don’t have enough left in the tank to tackle the big stuff, they probably do have enough to tackle one of these lesser questions.
But here’s where it gets interesting. Once they get involved, they end up turning all of the higher level brain functions back to the ‘on’ position. They start spending mental energy at a high rate. They go about these minor decisions as if they were of great import; they do a job that would earn them an A if the whole thing were an assignment in graduate school.
Which in turns makes them even more mentally exhausted, and that much less likely to take up more important questions and actions.
The little stuff ends up getting the attention, and the big stuff not only stays on the shelf, it gets pushed even further toward the back.
Now obviously the underlying theme here is prioritization. But this is more than a mere call for prioritization. We need to understand that when we don’t prioritize, not only does the more important thing go undone for the moment, there is also the possibility that we have made it even more unlikely that we’ll get to the important thing anytime soon. If a normal day greatly diminishes our stores of mental energy, adding minor decisions on top can fully deplete us – perhaps to such a degree that we can’t recover from just a single night of sleep.
An easy way to think about prioritizing decisions is to ask yourself the simple question of whether or not the thing you are contemplating is going to have an impact on when you can retire. If not, it may not be a major decision.
As for the little stuff, I’m not saying to ignore it. I’m just suggesting you recognize those decisions for what they are and treat them accordingly.
If you are wrestling with picking a data plan and the choices are $130 a month versus $150 a month, realize that you are not making a $1,800 decision ($150x12). You are making a $240 decision ($150-$130=$20; $20x12=240). As such, that’s probably like a five or ten minute decision. Not an hours-long process, or an entire Saturday lost to driving back and forth between competing providers trying to get the best deal. Knock it out and move on. I mean how wrong could you possibly be in that scenario?
In order to tackle big decisions, you need some mental energy available. It’s important to have an awareness of which decisions are big ones and which aren’t, so that you will know how to allocate your limited attention span (which is not an insult, just an apt description of how all of us work). If you burn it up on the little stuff, not only will the big stuff remain unsettled in that moment, it will probably also mean you need to recover before you are in the right frame of mind, pushing it even further out into the future.
No one would purposefully take the position that having the right cable package is better than having a well-engineered retirement. Just make sure to be aware of how you spend your time and attention, so that you don’t inadvertently end up putting more energy into the small thing than you put into the big thing.
By Brad Thomason, CPA
What if you have some stocks (or funds, or ETFS), sell them, and then the market goes up after that?
Well, you’ll likely experience a feeling of annoyance. You are likely to view those gains as being gains that are rightfully yours and could have been yours, save for the fact that you chose to walk away.
Those would be perfectly typical, and perfectly understandable thoughts to have.
But they wouldn’t necessarily mean you had made a mistake. When you want the second milkshake but don’t drink (eat?) the second milkshake, nobody really views that as a screw-up. Simply finding something attractive or desirable is not the ultimate arbiter of the question most of the time.
Sure you would want the gains. Obviously. But there are bigger questions at play, and it is those that determine how your decision should be graded.
For a long time I have made the argument that once people who are at or in retirement have enough money to drive the plan they’ve worked out, the justification for remaining exposed to the risks of the equity market becomes a lot harder to make. The practical implication of putting this belief into action is that each person will make an individual decision about when to leave the market; and that the decision really won’t have anything to do with what’s going on in the market (an external measure) but rather what’s going on with that person’s balances (an internal measure).
Everyone who is in the market rises or falls, for the most part, with everyone else. But the decisions of when to get in and get out are purely individual. And that’s something we shouldn’t lose sight of. You are only subject to the motions of the tide as long as you stay on the boat. But nothing makes you get on or stay on the boat but your own decisions.
Still, I get it. No one wants to miss out on something good that might happen. But in the end I think it comes down to a couple of sober realizations that don’t displace that desire, but which certainly exist right alongside it. The first is that once you have what you need to win, you really need to think differently about the prospects of losing it. Losses matter more to those who have more to lose; and if you have a fully-endowed retirement plan, then one could argue you have everything (at least financially speaking).
Investment market risk is something we often don’t have any choice but to accept because without investment returns our savings alone won’t grow to the level they will need to to do the whole job of ongoing retirement income. But once the need to grow goes away (because the target, plus a bit of overage perhaps, has been met), continuing to stay exposed to the risk starts to look more and more like gambling.
Second, everyone who exits equities is going to see them go higher at some point, anyway. At least that’s the conclusion history points to. Higher future market levels, for an exiting investor, are not an if, but a when. If you know going in that sooner or later the market is going higher, and you won’t be there to participate (because it is no longer a justifiable risk), why does it matter if the price increase happens the day after you leave or a year later?
It really doesn’t, not mechanically. It feels like it does. But the timing of the increase is less important than the reality of the increase itself; and you already knew the increase was coming someday. So why does the timing matter?
Anyway, while all of this makes perfect sense, if it was self-evident or easy there would be no need for people like me to write blogs about these complications. Nor would I do so had I not encountered actual investors mentally wrestling with this exact set of concerns. More than once. A lot more than once.
Even though it may not be easy, please consider the notion that the question of whether to scale back on stocks (or eliminate them altogether) changes as a person ages. Early in life, it is more of a return on investment question. But later it becomes more of an exposure to risk question.
At the point in time when it makes sense for you to walk away you are likely going to find it hard to actually do. Your brain will know it’s right, but some other part of you will be trying to hold the status quo. Part of that initiative will be based on the very real awareness that if you stay longer you may get more money.
But of course, you may participate in a drawdown, too. And if you don’t have enough money in other places to cover the bills, you will have to liquidate stock holdings at a discount, making those losses permanent. Which, back to the top, is why your brain knew it was time to go in the first place. And why you probably ought to listen to your brain when it determines you have reached that point in your investment journey. Irrespective of where the talking heads think the market is heading next.
Older blogs (2015-2017)