The Wisdom of Ignorance

It may seem like a misnomer to discuss the wisdom of being ignorant. Ignorance, defined as a lack of knowledge or information, is not viewed as a positive attribute. But it is essential for our individual success – both financial and psychological.

We are ignorant to how cell phones transmit a voice instantaneously across the globe to another person. We know that when we take medicine it will make us feel better, but we are ignorant to how the pill interacts with our cells to make it all happen. We are grateful other people know this so we can benefit from their knowledge. If we were not ignorant about certain things, we would not have the capacity to become an expert or specialist in other things.

There is simply too much information for us to process everything. Selective attention and ignorance not only make the economies function, but they make us all need each other. We value each other and are grateful for others’ expertise where we are ignorant, and vice versa.

When it comes to investing, ignorance truly is bliss. The news story of the day, the quote of the hour and the unreliable predictions do not help investors achieve better results. To the contrary, studies have shown that investors that pay attention to such fleeting information trade more often and achieve lower returns.1 In addition, the constantly changing market information produces greater stress and anxiety, which may weigh heavily on our personal lives and relationships.

As we come upon the Thanksgiving season, we are grateful that we have a choice of what we pay attention to and what we ignore. We cannot control the volume, frequency, or insanity of information, but we can choose what we allow in our minds.

With investing there is always something to worry about; always has been, always will be. But that is your choice. We have not heard of a single person, on their death bed, who wished they would have watched the market more often. Be wise by exercising ignorance in those things that detract from your happiness and focus your time and attention on what really matters.

  1. Dalbar, Inc. Quantitative Analysis of Investor Behavior

 

©2021 The Behavioral Finance Network

Climbing A Wall Of Worry

It is often said that stock markets climb a wall of worry. This makes sense since historically the market has gone up and there always seems to be something to worry about. 2021 is no exception. Year-to-date (through September), the S&P 500 is up about 15%. Strong stock performance despite the Delta variant, extreme political partisanship, debt and inflation concerns. 

Investors worry about volatility, and we even worry when there isn’t volatility such as in 2017. Absence of volatility may make us concerned about complacency or what we might be missing.  In other words, there is always a reason for investors to worry about something.

Worry is an interesting concept. Present worries trump anything in the past because we are living and working through it. The uncertainty and anxiety are felt today. This may cause us to overweight current concerns and result in a myopic, rather than long-term, view of the future. For long-term investors, it is advantageous to maintain a long-term perspective.

Concerns – Past & Future

What did investors worry about in 2019? How about 2018? The stock markets were negative in 2018, so we probably worried a lot. But we can’t remember. That is because worries tend to work themselves out. We adapt and adjust to our changing circumstances, especially the bad ones.

What will we worry about next month or next year? It could be a continuation of present concerns, or it could be something entirely different. But it will be something!

In our experience, we have seen that investors who focus on the “worry of the day” experience greater stress and are more likely to make an unwise investment decision. Worrying is part of the markets. It’s not worth the psychological or financial cost. 

If you have any concern, please let us know. One of our greatest values is to help you know what is worthy of your attention and concern and what should be ignored.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.

Creating a Virtuous Cycle

There are many concerns today that can significantly affect our thoughts, actions and quality of life. Fires out west. A devastating hurricane in the south. Afghanistan. COVID. The list could go on and on.

There are many things that are beyond our control in life. However, we can choose to focus on those things we have control over.

This is a great time to create a virtuous cycle to help us remain focused and become our best selves. Creating a virtuous cycle is empowering and enduring. It often results in greater contentment and success in our lives. It is an upward spiral of potential and progress.

A virtuous cycle is a product of our choices. It is not dependent on good luck nor avoiding bad outcomes. The following three tips can help you create your own virtuous cycle:

  1. Surround Yourself with Great People. We tend to take on attributes of those we associate with. These social connections influence how we think, feel and behave. It’s easy to be negative and a cynic; much more difficult these days to be an optimist – that is a gift.  Choose to be around positive people and allow their perspectives and disposition to rub off on you.
  2. Praise Others. Be liberal with complimenting others and slow to criticize. In our day this is much easier said than done. Direct praise (you are a great friend) is much better than comparison praise (you are a better friend than Linda). Combine gratitude with praise for the optimal effect (I appreciate how you listen and give me good advice). Direct praise increases another’s self-worth and your individual potential.   
  3. Avoid Negativity. We don’t always agree with others. Everyone has virtue and shortcomings. We can choose to focus on positive qualities of others (and ourselves) rather than their flaws. 

Circumstances may influence us, but they don’t have to compel us. We can choose to act positively, rather than be acted upon by negative externalities.

The Virtue of Slowing Down

Time is an interesting dimension. It is a fixed measurement, yet our perception of time varies greatly depending on what we are doing.

It has been said that the longest eight seconds in life is riding a bull. We never rode a bull and have no interest in testing that statement. So, we will take it as fact. But even so, eight seconds is eight seconds – regardless of what we are doing.

It’s About Perception

Time seems to “fly” when we are engaged in a fun, exciting or stimulating activity. And it appears to stand still when we are scared, anxious or bored. In other words, the things we enjoy in life make it “go” quickly, while the things we dislike seem like they last for an eternity.

This means that when we are engaged in desirable activities, such as summer vacation with the family, it may be worthwhile to take a moment to slow down and reflect on the experience. This will allow us to relish the moments and the subsequent memories – which we can call upon during the more difficult times. 


Slowing Down & Investing

Slowing down can also help us make better financial decisions. When information comes at us in an orderly rate, we can process the information just fine and draw logical conclusions. But when we get a ton of information all at once, our brain freezes – just like a computer when trying to process many things at once. 

When the brain freezes, it can no longer process information and think critically. That part of the brain is offline. If we require a decision right away, the brain will transfer the decision-making to our impulsive brain. That means our decisions will be more influenced by intuition and how we feel rather than thoughtfulness.

One of the things we love most about being advisors is helping clients decipher what information is worth considering and what isn’t. We’ve found that makes decision making easier, and can greatly improve the overall investment experience.