If you’re not, you need to make changes. Today.
Even if you have never listened to The Prairie Home Companion on the radio, you’re likely to know the name Lake Wobegon. It’s the fictional “little town that time forgot, and the decades cannot improve. Where all the women are strong, all the men are good-looking, and all the children are above average.”
Not only is that a funny line—and as someone who went to MIT, I appreciate just how few and far between math jokes are—it has even spawned its own sociological term, the Lake Wobegon Effect, “a natural human tendency to overestimate one’s capabilities.”
You see the Lake Wobegon all the time. Just about everyone rates themselves an above average driver, and yet you know that is not true even if all you do is take Sunday drives. And have you ever known even one single parent who has owned up to having an ugly baby?
You can also see the Lake Wobegon Effect in full force when it comes to people’s investments. Most people would rate them as above average investors. As in the description of lack Wobegon that can’t be true. And the math bears that out.
Listen to what CNBC wrote.
“Bad market timing and poor stock picking kept most investors from fully reaping the gains of the bull market last year [2016.]
“The average investor held too much in cash, was too concentrated in stocks that didn’t perform well and avoided financial stocks that rallied last year,” said Hart Lambur, co-founder and CEO of Openfolio, a social network with more than 70,000 members who share their investment portfolios.
The average investor on Openfolio had a gain of roughly 5 percent in 2016. That lagged the nearly 12 percent total return of the S&P 500, which includes dividends, by more than 7 percentage points last year.”
Successful people are not immune to these type of problems. At Tiger 21 the premier peer-to-peer learning network for high-net-worth first generation wealth creators that I founded members are required to undergo an annual grilling that we refer to as portfolio defense.
Members often prepare for days or weeks in advance, and the actual defense usually lasts for 90 minutes, no holds barred, and covers every stock, bond, private investment, fund position, and piece of real estate we own. Every holding is put under a microscope and you have explain why owning makes sense, that often is simply not possible if the asset has underperformed.
I urge you to go through this sort of exercise yourself. Do not do it on your own or with your spouse or significant other. It will be too easy to let yourself off the hook. You want someone (or someones) who will hold your feet to the proverbial fire.
What do you want to look for in that person? Three things. Someone who:
- Truly understands investments and has a track record of success. In other words, they need to be able to add value.
- Understands you and your hopes and dreams and
- Will tell you the blunt truth.
The truth can hurt. Momentarily. But what is far more painful is to continue to do things which are not in your best interest.
We all have blind spots, especially when it comes to investing. What steps are you taking on a regular basis to eliminate them?
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