Penalty Kicks and Portfolio Choices: Don’t do something just to do something
As a financial advisor, you face many challenges dealing with investors – particularly during turbulent market cycles. One of the most daunting can be the pressure to “do something” with a client’s portfolio when they’re scared even though your gut tells you to stick to your long-term strategy.
This tendency to act was extremely pronounced during the recent financial meltdown, even though history showed (again) the value of sticking to a disciplined investment strategy.
A research study on soccer goalies from a couple years ago provides intriguing insight into this type of pressure.
The study examined a full season of professional soccer. The data showed that out of 286 penalty kicks during the season, goalies dove for the ball 94% of the time.
But here’s the interesting thing: they’re actually much more likely to catch the ball by NOT diving. In fact,
- They caught 30% when they dove to their left.
- They caught 25% when they dove to their right.
- But they caught 60% when they stayed in the center. Twice as much!
So WHY did they dive?
Well, they dove because staying in the center feels – and looks – so indecisive. They’re much less likely to be criticized for missing the ball if they dove, even if they missed more often.
If they miss while diving, it was a good try. If they miss while standing in the center…they look like an idiot.
My point is not to avoid action. Rather, it’s to guard against the compulsion to act – such as making drastic portfolio changes – just to appear well-intentioned and decisive.
Always consider the rule physicians follow: First, do no harm.
RFS 5640-a
