I consistently talk to clients about controlling what they control when it comes to planning and investing. For instance, no one can control whether the stock market goes up or down. However, we can control things like spending, saving, and investment fees. Sometimes human nature makes the brain simply unable to control certain emotions - in this case - a good comeback story. The easiest analogy to make involves sports and investing, especially with NCAA basketball just starting their first practices.
Here is a question I ask clients:
In college basketball, what percent of the time does the team behind at halftime come back and win?
Answers are all over the place, but generally, people say between 30-50%. The real answer is about 23% based on 5,599 games played last season. Why do people tend to guess high? Human nature may suggest that people either enjoy rooting for the underdog or that it's familiar to them. How many sports movies have been made about an underdog feel-good story? Remember the Titans, The Mighty Ducks, Rocky, Bad News Bears, Miracle, The Little Giants, and so on. Whether the underdog won at the end of the movie or not, people seem to place some sentimental value on rooting for the underdog.
So what does this have to do with investing?
People's sense of optimism leads them to believe that comebacks are common. You rarely (if ever) see an ad for a mutual fund touting, "We've underperformed for 5 straight years, but our time is coming!" You also never see a fund manager on CNBC talking about their mistakes and how poorly their expensive fund is doing.
In sports it's similar. Which story makes headlines? The story about the team down by 15 at halftime and went on to lose by 25? Or the story about the team down by 15 at halftime that came back to win by 3 in double overtime? Definitely the latter. On top of that, you NEVER see the story about the team that is boring and consistently wins by 5 or so points per game. No one cares about that.
So when it comes to investing, although it may "feel good" to make certain decisions regarding your portfolio, at the end of the day the most successful investors are the ones that use low-cost, diversified, and boring portfolios. Lesson: Control what you can control and make sure to ask what bias is in the data - be a realist rather than an optimist.