Mushroom Hunting ≈ Financial Planning
As a city boy, much of what happens outdoors is a mystery to me and that certainly extends to those things I eat. As far as I know, food either comes in packages from a nice clean store or is delivered on a plate by a member of the waitstaff.
I understand from those who indulge in the outdoor pastime of fungi hunting that two of the most important aspects of this hobby are knowing where to look and selecting the best from among all that grows in the woods. Regular readers may not be surprised that I see some parallels between mushroom hunting and financial planning, making the approximately equal sign in today’s title appropriate.
Although the concept of financial planning is no more secret than the location of the nearest forest, there are certainly parts of the process which are not obvious at first glance. Likewise, there are numerous choices to be made as planning progresses, just as there are choices to be made between varieties of mushrooms.
As financial planners, Jalene and I must help define our clients’ long term goals and implement logical strategies to achieve them. One of the ways we are able to accomplish the first part of our job is by enlisting help with the second. After more than twenty years in the world of investing, it seems to me that the most valuable use of our time and experience is not searching for the very best mushrooms but for the very best mushroom hunters. Narrowing the field in which we must be expert from millions of individual securities to thousands of mutual funds reduces the time required to select investments for our clients and that allows us additional time to work directly with them. We have recently focused even more narrowly by selecting funds from Dimensional Fund Advisors for most of our clients’ assets. We are not the only ones to have reached this decision, as financial columnist Ron Lieber’s recent article in the New York Times attests.
Investment performance is a frequent topic of discussion with clients and prospects but I believe our greatest value lies in providing an overall framework which allows our clients to live their lives with reasonable financial certainty. Helping them manage risk, helping them make good long-term decisions, helping them avoid emotionally driven responses - those are the areas in which we are most valuable. Our clients have been pleased with our past investment results. Now that we’re working with DFA, their costs have dropped even further which should translate into improved investment returns.
Although I am not capable of providing food for my family through either hunting or gathering, I know it can be done. And, of course, it’s entirely possible for individuals to develop financial plans and implement investment strategies on their own. Whether to enlist assistance in obtaining food or financial planning is clearly an individual choice. Warren Ward Associates stands ready to provide assistance to those who want to consider outsourcing some of the financial aspects of their lives.
Which Came First, the Weather or the Climate?
I have begun using Bing for my internet search needs. If I enter the word “weather” and a zip code, the first result is a table showing three different forecasts for that area, one each from Intellicast, Foreca and iMap. The next result is a link to the wonderfully named Weather Underground website which offers forecasts and much more on a crowded page remarkably free of advertising. All of these are in addition to the original broadcast weather source, The Weather Channel, which is now available on the web and in newspapers too. If you compare forecasts among those five sources, you’ll rarely find consensus.
It seems we have almost limitless data about current and near future weather but information about those long-term trends known as climate, those which will affect the rest of our lives, generally remains clouded. I think the answer to the question in today’s title is that day-to-day weather is a result of very long-term global patterns but most of our information about those patterns comes from daily observations.
Are there parallels between weather and the world of investing? Well, perhaps a few.
There’s a wealth of information available about weather but none of it provides completely accurate forecasts. Also, the farther out we try to forecast, the less reliable our results are likely to be. Similarly, no matter how much study is given to markets and economic situations, the only thing which can be said with absolute certainty is that “something” will happen.
Another parallel is that the phenomenon known as “hindsight bias” comes into play. Whether looking at today’s weather or market results, in hindsight we think we should have been able to “see it coming” and been better prepared for whatever “it” happened to be. This bias can cloud our vision in a couple ways. First, we punish ourselves for not being able to predict the future more accurately. This encourages us to dig ever deeper into the often confusing details searching for insight. Second, our minds prefer order to chaos and try to identify similar patterns in past and present situations forgetting that no matter how much a current trend resembles a historic one, the outcomes are unlikely to be identical.
Finally, the noise of so much day-to-day information comes to take on increasing importance. It distracts us from both climate variations and long-term market trends. How many times have you seen panicked headlines advising of a terrible storm, only to find the reality to be much less serious? Likewise, how often do daily market updates provide highly accurate but useless information since your true interest is in the long term?
Focusing on the daily movement of the hundreds of indexes, let alone the hundreds of thousands of individual securities, can easily distract an investor from sticking to a long-term plan or even developing one in the first place. One of the most valuable services we render is reducing the emotions generated by the daily “clutter” allowing our clients to remain focused on their overall strategy.
If weather is analogous to daily market movements and climate is to long term market trends, should you be focusing on the S&P 500′s 1.8% drop on Friday, it’s 1.4% gain on Tuesday or its average annual gain of over 6% for the past 90 years? All the research in the world will not tell us about either the market’s value or the weather on a specific day fifty years in the future. In the case of weather, we try to be prepared by packing both an umbrella and sunscreen when we travel. In the case of markets, we diversify our holdings by owning stocks and bonds issued by large and small companies located in the US and around the world. The 24/7 news cycle may be interesting but it has very little value compared to developing a long-term plan and sticking to it.
