What Can Michael Phelps Teach Investors?

Did you watch the Olympics? As everyone knows by now, U.S. swimmer Michael Phelps broke the all-time record for the most medals won by an Olympian. What interests me is how his remarkable achievement resulted from a combination of dedicated physical training and mental preparation to manage the unexpected. For example, in Beijing in 2000, when Phelps’ cracked goggles filled with water, he simply counted the strokes to the wall, winning a gold medal in world record time in the process. Because his coach had Phelps train for that exact scenario in practice, he didn’t panic when he had trouble with his goggles in the race.

Investors can learn a lot from Phelps and the other Olympians. Like the athletes, once we dive into the market and the games begin, anything can happen. Some moments will be elating like when the unknown 15 year-old U.S. swimmer Katie Ledecky beat Olympic champions and set an American record on her way to a gold medal. And there will be surprises, too. For instance, think about Jordyn Wieber, the reigning world champion and the all-around favorite to win Olympic gold, who finished third among the American women, meaning she could not compete in the women’s all-around gymnastics competition. As they say, past performance is no guarantee of future results, right?

Like the more than 10,000 athletes in London who rely on their coaches to help them prepare for these highs and lows, as your trusted advisor, we help you develop a game plan that prepares for the unexpected and helps you move confidently forward to reach your goals. When the economy hits a rough patch, your investment policy statement that outlines your goals and our investment approach helps us to count the strokes to the wall, rather than throw in the towel. Your plan, with its clear future goals, keeps us energized when others feel exhausted by market volatility.

A recent piece in the New York Times, Do You Suffer from Decision Fatigue? underscores the importance of having a trusted coach and a solid plan in your corner to combat fatigue, especially in such an uncertain market. (Decision fatigue is a behavioral finance phenomenon that suggests that a series of difficult decisions can exhaust investors to the point where they fail to make good decisions.)

How fatigue impedes rational decision-making has been well documented across many fields. In fact, the Times article reports some amazing results from a year-long study of parole hearings in Israel. Surprisingly, prisoners who appeared early in the morning received parole about 70 percent of the time, while those who appeared late in the day were granted paroled less than 10 percent of the time. To account for the significant disparity in outcomes, researchers evaluated the severity of crime as well as the ethnicity and sex of the inmates, but it was the time expired in a session that drove the decisions. It was this simple — judges, having already made a number of taxing decisions that day, and that much further away from their last meal, were less willing to grant parole.

Think about that. Just like the judges who prefer the status quo later in the day, by the end of a long work day, the couch and a movie look pretty appealing. The same can hold true for a long bear market. In fact, in the investment realm, behavioral finance experts find that general decision fatigue can morph into an inability or disinterest in making any decisions at all. And that ultimately changes an investor’s worldview. Frozen in place, without a trusted advisor by their side to guide them, they see only market risk, not opportunity.

In a recent market commentary, Douglas Coté, CFA, the Chief Market Strategist at ING, provides some insight into just how much decision fatigue has affected investors in this uncertain market. In an unscientific sampling, he asked advisors, media people and institutional investors how many of ten broadly globally diversified asset classes in equity and fixed income were negative through June 2012. Their answers ranged from three to seven. However, surprise! All ten asset classes were positive through June — and July, too. And that unexpected and, frankly, unheralded performance is worthy of a gold medal! The question is how many more months of solid performance will be needed before the media’s negative point of view turns positive and weary investors wake up and re-engage with the market.

In the meantime, I hope our work together keeps your energy level high and your outlook positive.

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