Rereading dusty copy of W. Timothy Gallwey's 1979 book, "The Inner Game of Golf," I found some insight applicable to successful investing. Golf and croquet are unique in that they are the only sports that involve hitting a stationary ball, which leaves way too much time to think. Sam Snead used to suggest that struggling golfers hit the ball with their practice swings instead of the actual lousy swing that was the product of too much thought.
Chapter Four is entirely devoted to the condition of self-doubt. When we doubt the ability to create an effective outcome as we're standing over the ball, we set up a toxic, biochemical condition leading to tight muscles. This gets in the way of executing an intricate, otherwise intuitive combination of successful swing mechanics. When the latter happens accidentally despite our inclination to screw things up, it creates the magic that makes golf so addictive.
The flip side of self-doubt, of course, is overconfidence. A friend who once worked for the "World's Finest Criminal Defense Organization" ( Los Angeles County Public Defender Office) once said that the only place you want someone with supreme self-confidence is your defense attorney or your heart surgeon. The rest of us have to come to terms with some reasonable balance between our irrational expectations and self-doubt.
So here's where self-doubt enters into the realm of our investment decisions. The field of behavioral economics is full of evidence of how we are much more upset about losing money than any offsetting exuberance we might experience by making more than we expected. "Loss avoidance" is a big factor in decision-making when it comes to making money. Consider the nation's $17 trillion sitting in cash today as evidence that many investors burned by the 2008 implosion moved to cash after "selling down to the sleeping point," and who have been waiting ever since for a deep enough dip to prompt them to re-enter the market.
In fact, there have been two dips since 2008, but apparently neither was great enough to prompt enough cash holders to take the plunge. In August 2011 and again today, we have many investors "standing over the ball" trying to imagine all the things that could go wrong -- even with a move to a conservative equity/debt position -- and they just can't pull the trigger. In behavioral economics this condition is named the "status quo bias." We know we're not making money sitting in cash and that we're going backward thanks to 2.4 percent inflation, but the muscles in our brains are too tense to swing the club effectively.
A couple of ways to relax come to mind. One is to recognize how a 50/50 mix of stocks and bonds tends to lose relatively little in a typical stock market downdraft and that, over the past 10, 20 and 40 years this combination has earned an average of about 7.5 percent per year. The key is to use low-cost funds whose annual expenses are not chewing into that annual return figure.
Another relaxation technique is to consider the human capital that you have. The ability to earn money and add some of it to your investment portfolio on a regular basis can be reassuring. Google up "compound interest" and use those tables to make an estimate of what your existing account balance will accumulate between now and retirement and then use the same tables to calculate what future inbound contributions from now until retirement will generate assuming the same 7.5 percent rate of return. Adding the two numbers together creates what for many will be a pretty soothing result. Consider any other assets as well such as home equity so the pie is a large as possible. The greater the size of current and projected assets, the easier it becomes to enjoy a relaxed, cavalier attitude about periodic short-term declines.
Now, in this relaxed state of mind, examine the money you have in cash losing over 2 percent per year to inflation and consider moving some or all of it into a conservative mix of stock and bond funds. Don't succumb to analysis paralysis. Take a deep breath, relax, and whack the ball out of the park.