Overcoming Our Bias: Get It or Get Help (2 of 3-part series)

In response to last week's post outlining many of the neuroses that trip us up as investors, a reader and long-time client commented: "When you list all the behavior biases humans have it's a wonder ANY of us make money."

The plain truth is that a lot of us don't, and many more make far less than they would have had these biases not wreaked havoc with their investment strategy.

This site is not intended to provide specific investment advice. But I will share the single best tip I know:

As an investor, you have two choices: either come up with an investment plan that you fully understand and stick with it, or find someone (or some robot) that you can trust to manage your money for you. "Get it" or get help.

Being honest with yourself is not easy. But understand that this is not about intelligence. You clearly were talented enough to make this money in the first place. You may even have the analytical inclination, time and background with which to research and devise a comprehensive investment strategy. Or maybe you're good at cutting and pasting from the internet - admit it, it happens a lot.

But this is about overcoming deep-seated human emotions and their impulses. And for that reason, if you don't understand a strategy in a completely internalized way you stand little chance to stick with it when the waters get choppy.

Compounding this problem is the sheer volume of noise bombarding us from financial media outlets - both traditional and new. We are constantly given "information" with which to second-guess ourselves, and it literally gets louder every day (for instance, I'm not sure if Seeking Alpha has changed their submission policy or it's just the state of the markets, but my inbox has grown obscenely crammed with posts.)

I'm not saying hiring an advisor is simple or frankly feels good - on either our egos or wallets. Fact is, a 1% assets-under-management (AUM) fee on a $1,000,000 portfolio is $10,000/yr. Every year. Even in years when the value of your portfolio goes down. That is real money. In fact, management fees are about the only thing you CAN measure with any certainty in a given time period.

(Another post for another day - what should you expect to get for your fees? Are robo-advisors a good alternative? Sufficed to say, a quality robo-advisor would accomplish the regimental aspects of the point I am trying to make in this article.)

But what is the alternative? I'll spare you the statistics from the latest DALBAR Quantitative Analysis of Investor Behavior report, which purports to depict the average investor's underperformance versus a benchmark. Instead, let's paint a real-world scenario:

You research one of the leading robo-advisor web sites and find their asset-allocation for someone with your age and risk tolerance. You may not fully understand why the allocation is set up that way, but you know the platform employs Nobel Prize winners, and you have good basic familiarity with the specific assets they have chosen. You set up an excel worksheet with those assets and weightings, and buy the appropriate ETF quantities. You diligently track the portfolio to stay on top of portfolio rebalancing needs. Perhaps you even look to tax-loss harvest where possible.

That is a reasonably sophisticated, impartial plan to stick to, right?

But then emerging markets (e.g. VWO) 2013-2015 happens. And you start to wonder whether all of these countries aren't just debt-addled, commodity-dependent banana republics. Versus the productive U.S.ofA. that we can see and touch in our own backyard. And you google search "should I underweight emerging market stocks" and find the answer you're looking for - from several sources! So you tweak the sector weighting to a level that you "feel" is more appropriate.

Feel at all familiar? Let's see: loss aversion - check. Confirmation bias - check. And throw in some home country bias which I didn't even get to in the last piece.

And, of course, VWO is +14% YTD in 2016.

Look, I'm not saying that there isn't an argument to be made that in a strong-dollar/depressed global growth and commodity demand environment that emerging markets won't come under further pressure. I am saying that there are a small handful of people out there that are able to consistently deliver returns in a global macro book by betting on those types of shifting tactical allocations.

The rest of us, however, would fair far better with a more programmatic approach, yet human nature makes that level of implied discipline - especially when it pertains to our financial welfare - difficult to achieve. Get it or get help. Either way you will come out ahead, and free up your brain to contemplate far more interesting thoughts and your time to read far more interesting literature. Heck, you'll even be able to shift your daily anxiety quota towards all of the other troubling things out there these days.