Investor's Column: What do I do now?

Investor ColumnMarch 11, 2014 

As we move towards the end of the volatile first quarter of 2014, many investors are understandably concerned with their investment options. Stocks markets have had a great run over the past several years and consequentially valuations need to be considered. The 30-year bull market in bonds would appear to be at its end and cash rates are likely to provide negative real returns.

The most common question I get in this uncertain world is: "What do I do now?"

Let's first look at how we make decisions. Recently I read a great book on this topic by the Heath Brothers called "Decisive." Making difficult decisions is supposed to be fairly straightforward: You have a choice, you review your options, and then you make a choice and live with it. But according to the Heath Brothers, this logic is fraught with behavioral issues, biases and irrationalities. In short, the book suggests that "our brains are flawed instruments" when it comes to making


The research on why humans make bad decisions suggests this is the result of overconfidence, confirmation bias and short-term emotions. Read "Decisive" for great examples. Because awareness of our deficiencies does not in itself create change, the Heath Brothers have developed WRAP, a four-step process, to help us counteract our biases. Here's a summary:

W -- Widen your Options: Too often we think of our options in a narrow frame. For example, we might think: "Should I do this or that?" Instead, we should widen our minds and explore whether there are additional options beyond the either-or question. Is there a way to address both your near term concerns with your long term objectives? Would it be smart to consider setting up a cash reserve that you could access in the event of a market correction, thereby allowing your portfolio more time to rebound without the burden of cash distributions? Would a bucket approach to laddering risk across a series of time periods work for you? What other options do you have?

R -- Reality Test your Assumptions: "Confirmation Bias" can lead you to gather self-serving information. If you believe the sky is falling, then you might disregard any information to the contrary. Markets are very complicated and forecasts are rarely better than educated guesses. In an uncertain world, it's best to turn your attention inward to your own family comfort zone index and figure out how to meet your long-term goals without sacrificing your current standard of living. Understand that there is a range between an ideal lifestyle and one that is acceptable. Setting goal posts between ideal and acceptable can give you the ability to wiggle within a range of choices and help you pursue your goals and the risks you're willing to accept.

A -- Attain Distance before Deciding: We all can quickly come up with anecdotes of snap judgments that have led us astray. One way to separate your emotions from your decisions is through reviewing your priorities. If you can make incremental changes to your risk profile and stay within your family comfort zone index, then by all means make necessary changes. The key is to measure twice before you cut -- because if your risk profile changes would require you to make long-term sacrifices, then you should take some time to consider the consequences. What tradeoffs would you be willing to make? Reduce retirement spending? Reduce estate size? Retire later?

P -- Prepare to be Wrong: Because we're so poor at predictions -- especially when trying to forecast market returns -- we need to treat the future as a spectrum of possibilities rather than a single outcome. The best approach is regular checkups to assess where you are in your family comfort zone index. As Dwight D Eisenhower said, "Planning is everything….the plan is nothing." Since change is certain, it's important to be flexible enough to adapt to whatever comes your way. You need regular checkpoints and a way to rebalance objectives when appropriate. A review of where you stand should be relative to both your short and long-term objectives. It's also helpful to have an early warning system to address small issues before they become bigger problems.

What do you do now is a personal question that depends on your individual situation. You control your personal economics but be aware of your behavioral biases.

Gardner Sherrill, CFP, MBA, is an independent financial adviser with Sherrill Wealth Management, The opinions expressed in this material do not necessarily reflect the views of LPL Financial. Securities and advisory services offered through LPL Financial.

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