I think a lot about investing and financial planning. One time, when I was going downtown with my dad, in the passenger seat of his car, it occurred to me that investing is a lot like driving. My dad was frequently changing from one lane to the other, trying to get ahead. It was making me a little queasy and we didn’t seem to be progressing any faster than the rest of the traffic. I teased him by saying: “Buy and hold, Dad, buy and hold!”
The journey to retirement is like a road trip. There are probably some people who will jump in the car and start driving, just to be on the open road. Most people would probably consider the lack of planning to be ineffective, but many of the same people are heading toward retirement without a plan. A retirement plan doesn’t need to be fancy, replete with calculations and projections. It does, however, need at least a destination and a timeline. Where do you want to be and when do you want to get there? The default in our society seems to be: “mortgage-free, company pension, CPP + OAS at age 65” and that may be fine for most people. My goal is much more aggressive: “cover my current spending with dividend income by age 35.”
There’s a saying that “all roads lead to Rome.” Similarly, there are many routes one could take when planning a road trip. I recall a vacation when I took my wife and kids to Kelowna. That was our destination, but the next choice was how to get there? The kids were very young and we didn’t want to drive more than about three hours in a single day. For that reason, we chose to drive south from Calgary, stopping in a couple town overnight along the way. We could have taken either the north route, which is more direct, or gone even further south, through the United States (for no good reason), and in each case we would have arrived at the same destination. The experience, however, would have been quite different. The same is the case in financial planning. If I need to save $10,000 per year to retire by age 65, I could have it withheld and invested by my employer, I could earn a very high salary and spend most of it, I could earn a much lower salary and save a larger percentage, I could save it monthly or I could save it in a lump sum, once a year. Further, if I invest very conservatively, I may need to save $15,000 per year, whereas investing more aggressively may allow me to save only $8,000 per year, while running the risk of having to save more if the investments fail. All of these choices affect the experience, while all leading to the same destination.
I think that making investments is like driving in city traffic. They are both actions that are ruled by the individual decisions of a large number of people, and affected by the environment within which they exist. Think first of the choice to change lanes. I would decide to change lanes for one of two reasons, either I need to be in the other lane to exit later, or because the other lane seems to be moving faster. Sometimes one lane is genuinely moving faster, either because there’s a blockage in the slow lane, or because cars are exiting from the faster lane, making space for more vehicles. Many times, though, other drivers will move into the “faster” lane, slowing it down. In the end, many times, both lanes will be moving again at the same speed. Similarly, some investments geniunely produce great returns. However, as investors see the opportunity, the price is bid up and the potential for future outperformance is reduced.
I have also noticed that a person’s disposition affects their driving similarly to how it affects their investment decisions. My father is a relatively aggressive driver, trying to find the fastest lane and moving back and forth in an effort to get ahead. Likewise, he makes investment choices that others may consider risky. He tries to be continually aware of obstacles and potential problems, and in this way he has had some success. I prefer to make calculated guesses, then just live with my decision until it becomes very obvious that it’s not working. In driving, I’ll choose a lane based on past experience (the outside lane of the on ramp to the freeway) or based on a reasonable expectation (the inside lane of a large street with many intersections, expecting cars to exit my lane to enter the turning lane). Similarly, I buy investments with large dividends, then patiently accumulate payments, unless something goes wrong with the company. Other people prefer not to drive, and either to rely on others to give them a ride or to take public transit. I assume these same people would be well-suited for passive investing.
A constant temptation is to compare my results to others. My wife believes that, to me, it doesn’t matter how quickly we get somewhere, as long as we get there quicker than someone else. I’ll change lanes, then change back in front of the car that had been ahead of me, just to feel that I’m making progress a little faster than them. However, when traffic in general slows down, or when there are many traffic lights, no one can really make much progress. Similarly, interest rates move beyond the control of investors, and the stock market rises and crashes. We know that these are the parameters within which we invest, and it makes no sense to rail against it. Instead, we should invest accordingly (I try not to drive during rush hour, and I try not to invest unless markets seem cheap).
I’m not sure that we can learn how to invest by driving, but I think that driving and investing both offer glimpses of insight into a person’s personality. How does your personality affect your investing? What methods seem most aligned with your personality? Does this hold true in other areas of your life?