Tim Hoyle, CFA, Chief Investment Officer
thoyle@haverfordquality.com
Focus on What You Can Control
Our previous commentary from February 23rd already feels like it was written ages ago. That is a common side-effect of a crisis: time slows down for no apparent reason other than to make the pain last longer. It is hard to imagine what it feels like for Ukrainians fighting to defend their home. In this context, writing about financial matters feels less critical, but it is our job to provide emotion-free advice, which is what we strive to deliver.
Falling prices can be stressful. Some people deal with stress by ignoring the cause; some like to eat their way through stress. Others cope by trying to learn as much about a situation as possible with the hope they will be able to influence the outcome.
There is a cognitive bias known as the Illusion of Control, which is the tendency to overestimate how much control you have over the outcome of uncontrollable events. No matter how much we try to make sense of certain macro events, or daily price moves, we are unable to control them.
Therefore, I would like to highlight three items over which we have significant control to ensure our efforts as advisors and investors are focused there.
Your Goals:
The primary reason most of us invest is to increase our probability of achieving certain milestones in life: the purchase of a home, a comfortable retirement, or creating a legacy. Will volatility and uncertainty today put achieving those goals at risk? Probably not, as most investing goals are years ahead of us. Stay focused on your plan and stay in contact with your advisor to assuage your concerns and control what you can in this scenario.
Asset Allocation and Cash Reserve:
As life’s milestones become nearer-term events, investment allocations must be adjusted accordingly. It is important to avoid the risk of having to sell at the wrong time. Times like this are also perfect for reassessing the size of your Linus Blanket1. Investors – both individuals and institutions – very likely need to have some portion of their assets in principal-certain, cash equivalent assets. Having a realistic and accurate self-assessment of the size of your blanket will provide you the security to remain long-term focused.
Emotions:
Charlie Munger has said, “Having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control.”2 Successful investing depends on keeping your emotional impulses for action in check.
Despite our inability to control macro events, we are incorporating the probable long-term effects of Russia’s invasion into our economic and investment outlook, which will be available in the coming weeks.
[1] The phrase Linus blanket denotes an object depended upon for reassurance and comfort. It was named after Linus van Pelt, a small boy who carries a blanket for comfort in the comic strip Peanuts, by the American cartoonist Charles Monroe Schulz (1922-2000). – wordhistories.net
[2] https://www.yahoo.com/now/charlie-munger-character-traits-cultivate-203332255.html
