Structure and Freedom

What do you need in your job, your kids need in life, and your investments need?

They need the Structure to Succeed. They need the Freedom of choice. They need Cadence and Flow. They need Chemistry so the parts are greater than the whole.

Think of a time when your kids were at their best playing sports. Your child likely did his best when he had a coach that provided him with the perfect balance of the structure to succeed and the freedom to fail.

A coach that sets up an out of bounds play in basketball that only has one passing option has too much structure and not enough freedom. A coach that sets one up with three passing options, has struck that balance.

When my kids are at the beach, they have the structure of activities that a beach allows, and I give them the freedom to experience the beach in those ways - building sand castles, fishing/crabbing, boogey boarding, looking for shells, swimming, and countless others. Skiing is similar - they have the structure of a blue or green trail to select and they have the freedom to get down the way they want - fast, slow, through the trees - you get the idea.

I bet if you take that to your own work, the exact same thing happens with your best work - your boss knew how to balance these attributes. You know what needs to be done and you have the freedom to accomplish it the way you want. This likely created flow or cadence - intense focus, authority to choose and creative license in the activity, not too hard or too boring, immediate feedback. This is often framed in a team environment and likely feels best when everyone is making everyone else better.

Now let’s take that to your investments. Your adviser should be providing you with a structure to succeed - anything he is recommending should be achievable and specific. At the same time, there should be some freedom so that you are motivated/empowered to control your destiny. That freedom is necessary because "life happens" and you need those degrees of freedom so that the plan doesn’t have to fail but is capable of pivoting. Job change, sick parent, kids in day care or private school - just to name a few.

Market behavior can be a lot like the behavior of your kids. Most of the time, they behave well. However, there will be times where they do misbehave. All parents and all investors have different thresholds for this misbehavior and how they respond. Market misbehavior is typically accompanied with four behaviors: do nothing, buy more, go to cash, or adjust your portfolio. Recognize that these answers may be different for individual stocks than for the overall market as the concentration risk and the factors involved may influence the answer (hopefully your advisor is coaching you on this - that is a different matter for a different time).

Do nothing: Most market “tantrums” are temporary. You and your portfolio may just need a hug and to learn from the experience.

Buy more: If this is done within the structure of an investing plan, you likely will do this several times in your 401k or other automated contributions. This is the cadence that leads to better plan adherence. If it’s done under the emotional premise of fear or greed, then we should probably think twice.

Go to cash: This is the least healthy situation. It is emotional and binary in a system of complexity. It doesn’t involve a plan - it involves an emotional trigger, a hunch, a gut feel.

Adjust your portfolio: Adjusting your portfolio because of market behavior as a catalyst shouldn’t be done on the fly. Building action triggers that have no emotion is the best way to do this. Typically this involves rebalancing, making a slight adjustment to your allocation, or changing the holdings within an asset class. These can be healthy, they can be over-engineered, they can be ill-advised. In any event, proceed with caution and know what you will do before the drama gets underway. This is about intent and execution matching each other. If you proceed without intent, then this will likely not go they way you like and make you more emotional the next time around.

The bottom line is that whatever you do in this space should have the same critical ingredients your kids have on their sports team.

Structure: Having a Plan as well as a well designed Portfolio to support that plan.

Freedom: A Plan where you understand the impact of changing your spending, your savings, or your portfolio allocation - but having the freedom to choose these options is a great way to make sure you stick with the plan.

Cadence: Regular updates, regular contributions - “flow” that is automated to reduce the impact of misbehavior by you or the markets.

Chemistry: The parts are greater than the whole. They temper the misbehavior.

Structure, Freedom, Cadence, and Chemistry - The next time you are experience frustration with a team you coach, how your kids are responding, the work you do, or how your financial plan and investments are working - look at these four ingredients and figure out what isn’t working and take control.