Articles and Resources from the FourThought Team

< back June 29, by Scott Pinkerton, CFP®, AIF®, CIMA®, CPWA®

What the Bubba Wallace Story Can Teach Us About Investing in This Moment

When a hangman’s noose was found in the garage of Black NASCAR driver Bubba Wallace, there was an immediate cry for justice and widespread horror that such events are still taking place.

The story unfolded differently, and in hindsight can teach something about investing: how emotion can blind us to possible outcomes. 

The death of George Floyd and the Black Lives Matter protests have dominated the news for weeks. Bubba Wallace, one of a few African American NASCAR drivers, led the successful effort to ban the Confederate flag from NASCAR events and has Black Lives Matter painted on his car. On Sunday, June 21, a rope tied with a hangman’s noose was found in his team’s Talladega garage.

NASCAR officials, Wallace’s fellow drivers, and most media outlets immediately assumed that the noose had been placed there recently, in defiance of Wallace’s actions and to send a threatening message directly to him. Imagery of horrible lynchings and stubborn racism made headlines. Most NASCAR fans reacted with sadness and the other drivers stood in solidarity with Wallace.

Fast forward to Tuesday. Julie and I are dog sitting our two “grand dogs.” Our routine is to eat, walk the dogs then watch the news.  As we started our walk Julie said, “I just saw the news and the FBI says the noose found in Bubba Wallace’s garage has been there for months.”  My heart sank.  I thought to myself, “Another hero is going to be taken down.”

Indeed, ugly memes began circulating by those who assumed Wallace had staged the noose as a publicity stunt. At that point, it was not widely reported that it was actually NASCAR staff, not Wallace or one of his team members, who found the noose and brought it to his attention.

What we see is limited by what we know, where we look, and our own perspectives and biases. 

In this case, I had no idea that NASCAR teams randomly rotated garages and those garages are randomly assigned, nor that NASCAR staff found the noose. The way I heard the news headlines led me to believe that Wallace routinely used that garage and found the noose himself. The FBI concluded that the noose could simply have been a knotted rope. While some dispute that (photos were recently released), it is clear that the person or people who placed it there could not have known that Bubba Wallace would be using that particular garage at that particular time.

My mind drew conclusions. Sometimes our conclusions can lead to disasters. Jumping to conclusions has led to wealth destruction for millions of people since the beginning of time. It is useful to know and remember that we may think we have the perception of the Shepherd, but we really have the perception of sheep.

There are two important steps to avoid being victimized by conclusion jumping: be aware of your biases and limit your ability to overreact. 

At FourThought Private Wealth we do this through a concept we call “guardrails” in our tactical asset allocation. We think of guardrails on a highway. They are designed to keep us out of trouble. They are strategically placed around a curve before an obstacle, in a spot before the danger. If you hit a guardrail your car may be damaged, but you will likely avoid total disaster.

Based on their objectives and goals, we help our clients develop a strategic, long-term asset allocation.  Think of this as a path. Then we use tactical allocation adjustments to increase or decrease our exposure to an asset (usually stocks).

For example, we are currently allowing cash to build in our clients’ portfolios by selling some stocks and not reinvesting. 

We are letting our allocation drift away from our target. If this continues, we will begin to brush against the guardrail.

In my more than 30 years of helping people and families accomplish their financial objectives, I have witnessed some failures. These happen for several reasons, like lack of diversification and overleveraging, but the biggest culprit is the lack of investment guardrails, or investment humility.

As of June 28, the market had recovered much of its pandemic-related losses. However, Covid-19 is spreading.  Florida continues to announce record numbers of new cases. There is a feeling that the market may go back down.  We are not blind to that possibility and are taking action.

But remember Bubba Wallace.  Is there something happening that what can’t we see?

The chief economist at Fidelity wrote this week about signs of economic strength and the impact of government stimulus, especially on small businesses. He believes we are beginning a new bull market.   On the other hand, the number of new cases and the possibility of new stay-at-home orders is depressing. It can lead us to be overly pessimistic. That is why guardrails are so important. They prevent us from driving into the dangerous curve.

As our partner Bill Mehserle shared on last week’s “Four Facts with FourThought” (if you didn’t see it, like FourThought on Facebook and Linked In), nearly a third of retirees pulled their investments out of equities and invested in money markets during the pandemic.

There is no reason to make binary “all or none” investment decisions because we can’t presume to know everything and we are not gods: we can’t see the future.

The Dow closed around 25,520 on Friday, June 26.  Pretend you invest without guardrails and decide to get out of the markets on Monday, June 29.  Your reasoning is that the markets seem to be ignoring the obvious Covid-19 data and we are heading for another shutdown. The memory of the recent pull back is fresh on your mind and you don’t want to see your portfolio go down like it did in March.

Fast forward two weeks and the Dow is down 1,000 points. Infection rates are bad but nothing else has changed dramatically.  What do you do?  Probably nothing.  Fast forward another month.  The Dow is now at 23,000.  The focus is on the election and you are convinced that if the candidate you hate wins, the economy and the markets will tank.  What do you do?  Probably nothing.

Then, for no reason at all the market rallies and the Dow is back to 25,000.  What do you do? Probably nothing. You have already sold your equities and the news is still bad.  Can you tell I have seen this movie before?  It doesn’t end well.

I see portfolios today that hold cash that was raised in 2008 when equities were sold at the bottom of the recession. Twelve years later, the investors are still waiting for markets to go low enough to buy again and recoup their losses. They, like so many around the Bubba Wallace story, jumped to conclusions and the results were disastrous.

Selling plays into our natural aversion to loss. It also puts us at terrible long-term risk.  People get out of markets when the news is bad. They don’t realize that markets always (yes always) bottom out and head higher when the news is bad.  The market is a forward indicator.  It will go up before the news is good. Guardrails allow us to forecast without putting our long-term plans at risk.  They protect against the unseen.

Scott Pinkerton, CFP®, AIF®, CIMA®, CPWA® is the managing partner of FourThought Private Wealth

FourThought Private Wealth is owned by FourThought Financial, LLC (FFLLC) is an SEC-registered investment advisor. For information pertaining to FFLLC please contact FourThought Private Wealth or refer to the SEC’s website,www.adviserinfo.sec.gov.  This presentation is provided for informational purposes, not as personal investment advice. This presentation may contain certain forward-looking statements which indicate future possibilities. Any hypothetical example is intended for illustrative purposes only and does not represent an actual client or an actual client’s experience, but rather is meant to provide an example of the process and the methodology. Any reference to a market index is included for illustrative purposes. It should not be assumed that your account performance will correspond directly to any benchmark index. There is no guarantee views and opinions expressed herein will come to pass. Past performance is no guarantee of future results.