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Relearning peekaboo in the pandemic

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By Joel Dresang

I noticed that our passports expire this year and suggested to my wife that we take steps to renew them. Her reply: “Why? It’s not like we’re going anywhere.”

While being facetious, she expressed exasperation common to pandemic fatigue. Many of us feel we’re in the bleak gray winter of a Russian novel. Even if we’re fortunate to have kept our health, kept our jobs and kept our investments growing, we can’t remember the bright warmth of the sun — as if it’s gone and never coming back.

Many of us are behaving as if we have no memory of life before COVID-19, no vision beyond our current confinement. And it may be affecting how we deal with our retirement investments. For example:

  • The Pew Research Center reports a surge in baby boomers retiring since the pandemic. In the third quarter of 2020, 28.6 million boomers were retired, up 3.2 million from the year before, outpacing the usual gain of 2 million a year.
  • The Center for Retirement Research at Boston College cites a pattern of sexagenarians claiming Social Security retirement benefits during recessions. Those retirees often end up regretting forgoing the higher payments they would have received by claiming later.
  • According to a survey released in December by Kiplinger’s magazine, 31% of individuals ages 40 to 74 took advantage of pandemic allowances and withdrew retirement investments from their 401(k) account; 27% borrowed from their 401(k).

Individual circumstances vary, of course. Hardship and lack of options can compel early retirements and early withdrawals. The point is it’s important to keep a longer-term perspective and beware of human tendencies that muddle decision making.

My wife’s remark about traveling was an example of the sort of out-of-sight/out-of-mind thinking that tricks us into forgetting what life was like before. Such amnesia gets in the way of planning for brighter days ahead – whenever they may come.

It reminds me of “object permanence” — a knowledge that infants acquire that tells them something hasn’t disappeared just because they can’t see it. Before they have object permanence, children panic when a plaything falls off their highchair tray. To them, it’s as if the toy dropped off the face of the earth. They wail when Mommy moves out of view — as if they fear she is never coming back.

When they eventually discover object permanence, children delight in endless games of peekaboo and hide-and-go-seek. Now you see me. Now you don’t.

A lapse in object permanence — behaving as if pre-pandemic life is never coming back — can harm investors, similar to how recency bias distorts perspective. Recency bias is the tendency to interpret our latest experience as a predictor of the future: If the markets sell off, for instance, we expect them to keep selling off.

Other Money Talk articles from Joel Dresang

Recency bias leads us to believe the latest market trends won’t change. A lapse in object permanence makes us forget that markets were ever different. Both conditions ignore objective long-term perspectives and affect what’s known as the behavior gap.

“What we find is that investors tend to underperform the investments they invest in,” Kyle Tetting said in a Money Talk Video. “And, specifically, when you look at mutual funds, you have these measurements of investor return and investment return, and what really describes that difference is a behavior gap – that investors just aren’t behaving the way they should be behaving with investments.”

In emphasizing the recent past and losing sight of how things were before, investors become more susceptible to the harmful emotions of fear and greed. Especially in volatile markets, Kyle said, emotional investors tend to buy and sell at the worst times, thus the investments outperform their portfolios.

The solution, Kyle said, is to base investments on reasons — and to trust in those reasons.

“Have a thesis for that investment,” Kyle said. “Really understand why it is you’re buying it. And ultimately, every time you want to make a decision about buying or selling that fund, buying or selling that investment, remember what that thesis is, and really focus on why it is you’re holding what you’re holding.”

On the counter behind my wife, as she sits at the kitchen table, her chief workspace since last March, rest two travel guides I bought her.

  • The guide on Austria was meant for a 2019 trip we postponed in place of a family vacation around the Grand Canyon and later a long weekend for two in New Orleans.
  • The guidebook to Paraguay was for a trip in 2020 to see our daughter in the Peace Corps. But then the pandemic prompted the evacuation of the Peace Corps.

The other day, my wife informed me what we need to do to renew our passports. She showed she’s looking past the pandemic and considering the potential of precautions and vaccines. She’s thinking about the lifting of restrictions, the lifting of our own reservations.

Travel isn’t in our picture now, but it will be in our future. Whenever it comes, it’s prudent to prepare for it.

Joel Dresang is vice president-communications at Landaas & Company.

Learn more:
Why investments outperform their investors, a Money Talk Video with Kyle Tetting
Don’t underestimate how much you’ll change, by Joel Dresang
The ups and downs of volatility, a Money Talk Video with Steve Giles
7 tips for successful investing, a Money Talk Video with Marc Amateis
The Importance of Balance for Investors, a Money Talk Video
Market Volatility: Check Your Emotions at the Door, from the Financial Industry Regulatory Authority
Your one-minute guide to stock volatility, from the Financial Industry Regulatory Authority
(initially posted January 28, 2021)

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