The Sequence of Our Behaviour

It was a party at the house of a hedge fund manager in the wealthy New York enclave of Shelter Island. In attendance were the famed writers, Kurt Vonnegut and Joseph Heller.

Long-time friends, Vonnegut turned to Heller and informed him that their billionaire host had made more in a single day than Heller had earned from his bestselling novel, Catch-22, since its release.
Heller responded, “Yes, but I have something he will never have – enough.”

It’s a famous story and been retold many times, but understanding what enough is for each of us remains an elusive pursuit. How often do we hear the question, “how much do I need to retire?”

Hearing someone being able to confidently state they have enough may provoke some envy, but it shouldn’t. Enough will always mean different things to different people. Given Joseph Heller was a successful author, it may seem it would be easy for him to identify enough, even if he assumed the hedge fund manager couldn’t. Heller suffered from ill health, with a bout of Guillain-barré syndrome, so it may have offered some perspective on fulfilment and what he found important.

And it wasn’t the only famous anecdote Heller has to his name about understanding himself and life, from his obituary:

When an interviewer told Mr. Heller that he had never written anything as good as ”Catch-22,” the author shot back, ”Who has?”

Suggesting Heller was a man who knew what success was and how hard it was to achieve. There was little need to try and outdo himself based on the expectations of others.

Enough will initially be viewed as a financial position, but as Heller shows, more than money, ‘enough’ can be a mental luxury. The ability to assess what really matters. It’s being able to identify our needs, wants, motivations and any triggers that might derail our contentment.

It’s not just knowing when and where enough is. Knowing we are on the right track to enough is another dilemma. If you don’t know who you are, what you want and how much you need, one of those triggers might be pulled. As the recent GameStop incident showed. That vortex pulled in all manner of otherwise sensible actors. From the Financial Times: (paywall).

Michael, a corporate accountant who asked that his last name not be used, said he moved his $69,000 Vanguard retirement account into GameStop shares when they fell to $230 per share on Monday. Yet as the shares continued to tumble, he offloaded his holding on Tuesday, crystallising a $42,000 loss.

“I built that . . . balance over a three-and-a-half-year period,” he said. “And in a moment of intense hype, in a moment of weakness for me, I messed it all up in a matter of a day.” The 27-year-old said he believes he can bounce back from this loss by the time he wants to retire. “But I should’ve known better.”

And from the Wall Street Journal: (paywall).

Salvador Vergara was so enthusiastic about GameStop Corp in late January that he took out a $20,000 personal loan and used it to purchase shares. Then the buzzy stock plunged nearly 80%.

Mr. Vergara, a 25-year-old security guard in Virginia, started investing four years ago after deciding he wanted to retire young. To save money, he drives a 1998 Honda Civic, eats a lot of rice and lives with his dad. He stashed his savings mostly in diversified index funds, which are now valued at about $50,000. Then Mr. Vergara, a longtime reader of the WallStreetBets page on Reddit, saw others posting about buying GameStop shares and the stock’s colossal rise.

He didn’t want to touch his index-fund investments, so instead he got a personal loan with an 11.19% interest rate from a credit union and used it to fund most of his GameStop purchase. He bought shares at $234 each.

From a corporate accountant to a security guard living frugally. Financial markets are democratic and available to everyone who can save and contribute to a portfolio. Equally, financial information and education are available more widely than ever before. These two young men had correctly identified index funds as the most efficient and effective way for the average person to build wealth over the long term.

Their short progress towards retirement started strong. The one thing unaddressed: their behaviour.

Despite their relatively good positions for their age, as the old saying goes, “if you don’t know who you are, this (the market) is an expensive place to find out.”

In one sense these young men are lucky. The most youthful among us have the greatest luxury of all. They can make a financial mistake without the mistake being near ruinous. With every additional decade, the chance of recovery from a poor financial decision narrows. If 57-year-old Michael makes a similar mistake with his $690,000 Vanguard retirement account, he won’t enjoy such a comfortable retirement.

What is the likelihood of something so drastic occurring? That relies on a person understanding what enough is. It may not be a financial question, but it may have a financial impact. Anecdotally we can say that age doesn’t automatically gift us any behavioural respite. Much is made of sequencing risk, which concerns the likelihood of poor returns in the years pre, or post retirement, because it can materially affect a retirement lifestyle. What we hear less about is the sequence of our behaviour.

Out of character, panicked and rushed decisions don’t just occur during major market sell offs. Investors can be coasting towards retirement having done everything right for decades only to make a sequence of seemingly unexplainable decisions when they down the tools. This derails much of their good work. On other occasions, investors sensing the years ticking down worry about enough and gravitate towards an investment they believe will materially improve their retirement lifestyle. It materially worsens it.

Moving into retirement is a major transition. It requires clarity and careful decision making. The wiser among us can make the mistake of believing our previous unblemished record means we’ll be fine. Assuming we’ll have no behavioural issues. While there’s often discussion about resilience and stoicism in financial decision making, understanding what’s prompting us to make decisions and understanding what enough is for each of us is arguably more important.

Partners not on the same page. Sudden access to a lump sum. Deeply ingrained financial beliefs. Health concerns. Feeling you are missing out on something. A lack of purpose after work. Even a subtle change can put us off balance.

A person or couple may have enough financially, but other factors may have them making poor decisions. Enough can be whittled away very quickly by a lack of contentment. It means using spending as a crutch or changing investments looking for fulfilment. The margin for error isn’t there as it was when a person was younger. Being able to define what enough means in life and money is important.
Don’t be afraid to have the conversation with someone who can help.