31 Jan 2014 Do You Want to Win Big?
Despite an overwhelming amount of evidence that passive investing over a lifetime generates far more wealth than active, hands on investing, most people still hold to their losing programs. It doesn’t sound logical because it isn’t. Logic has been overcome by the emotion of hope – the hope of winning big. Logic alone doesn’t really have a chance, it is outgunned. For real progress, there has to be a third component.
We humans are of two distinctly different minds. There’s the emotional, which feels pain and pleasure and is instinctive. Then there’s the rational, which analyzes and plans. The best analogy I’ve seen to describe the tension between our two minds is one from Jonathan Haidt, a psychologist at the University of Virginia. Chip and Dan Heath use the analogy throughout their wonderful book called Switch.
Haidt says that “our emotional side is an Elephant and our rational side is its Rider. Perched atop the Elephant, the Rider holds the reins and seems to be the leader. But the Rider’s control is precarious because the Rider is so small relative to the Elephant. Anytime the six-ton Elephant and the Rider disagree about which direction to go, the Rider is going to lose. He’s completely overmatched.”
The analogy elegantly describes why those of us who prescribe a passive approach to building wealth are so massively overmatched by the herds of Elephants out there motivated by the possibilities of winning big. To make matters more challenging, the Paths the Elephants instinctively follow is cleared, flattened, groomed, lit and paved by a financial services industry that knows far better how to communicate with Elephants than their own riders do.
After 32 years of working with Riders only to see their elephants carry them down destructive paths, through the process of Wealthcare, we’ve learned to appeal to both the Rider and the Elephant. In the words of the Heath’s “the Rider provides the planning and direction and the Elephant provides the energy.”
In the vernacular of Wealthcare, we encourage the Elephant to dream big lofty goals, while reassuring the Rider that he or she will confidently reach or exceed their goals. The real beauty of the Wealthcare process is Path. Just think how much easier it will be for the Rider to control his Elephant when the Path happens to go exactly where the Rider wants to go.
We provide a path like the one above for every one of our planning clients to motivate and encourage their Elephants while rationally communicating confidence and progress to their Riders.The path reveals a range of dollars presented in today’s terms required to meet every goal they value for each year of their lives. The left border represents a 75% probability of meeting or exceeding their goals, while the right indicates 90%. We draw the line at 90% because confidence beyond that requires our clients to save more, take more risk, and/or work longer than is required.
We continually groom and check the path to make sure it leads where we want to go. Take a look at the section at the bottom of the figure titled “Odds the Plan Will Need to Change.” Notice that in the next five years, there’s a 50.8% chance of wandering off the path. When those unexpected circumstances arise we may need to add a turn to get back on the path of confidence of getting our Rider and Elephant where they want to go, sooner and bigger. Stated another way, there’s a 50% chance in just five years that our Elephant and Rider would be wandering aimlessly without our guidance.
By the way, any adjustments we might need to make along the way have already been Elephant/Rider-tested and approved. When a plan becomes under-funded (under 75%) our advice, whether it be saving a little more, working a bit longer, or increasing risk modestly, is exactly what the client has told us they would want to do when or if required. If their plan becomes over-funded (over 90% confidence) we will recommend something the Elephant wants to do sooner or bigger, or the Rider wants to do less of.
Do you hope to win big? Call us or make an appointment online to get you and your Elephant headed in the right direction.