From the desk of Willie Delwiche.
“If you board the wrong train, it is no use running along the corridor in the other direction.”
- German pastor and Nazi resistor Dietrich Bonhoeffer
If the train you are on isn’t going where you want to go, changing locations on the train is of little use. You are still going to wind up in the wrong place.
Sometimes, we believe a train is heading to one place, when it’s actually going somewhere else. Or, after boarding, our view of where we would like to go changes entirely. In either case, we are on the wrong train and need to think about how to get off.
It happens more often than you might think, even though most people don’t spend their days riding the rails. For instance, financial firms spend a lot of time and money developing and implementing financial planning software (trust me, I’ve seen it up close). The goal is to get clients on the right train and then encourage them to stay put. Boarding the right train means knowing where the train is headed and being comfortable with that destination.
That’s fine — when it works. But challenges emerge when we find ourselves on the wrong train. Maybe it’s heading in the wrong direction. Maybe it’s traveling too fast or too slow.
We need to make a change.
It’s easier for firms to assume the software got it right and considered the appropriate opportunity set of investments, then properly evaluated investor risk tolerances. In their view, the client is on the right train. Of course, this also means they’ll warn how costly it can be to make a change.
This much is true. Jumping off one high speed train and climbing aboard another is a dangerous endeavor. After all, taking action means taking risks.
But there are also risks associated with staying the course.
A better approach might be to think about changing trains at the next station in order to get back on the right track. In terms of investing, this means allowing asset allocation mixes to be a dynamic match of both investor risk tolerances and current market opportunities, including providing a disciplined approach to making these adjustments.
Most tactical decision making is not about picking tops and picking bottoms or jumping from one high-speed train to the next. It’s about weighing the evidence and finding the balance between risk and opportunity within and across asset classes. Don’t frame it any other way.
We all want to be on the right train. We want the ride and the destination to be consistent with our expectations.
If we find ourselves on the wrong train, we don’t need to stay put.
We can’t let fear prevent us from making the changes we need to make.