Too much feedback

Early this year I did something I have practically never done: went on a diet. I have always been very active and generally put in decent annual miles on the bike. But years of assuming that being active meant I could do whatever I wanted when it comes to beer and pizza had started to add up a bit. My wife was getting more serious about her race season (marathoner/ultra) so I told her I’d tag along diet-wise.

We did simple stuff: less sugar, less booze, less junk, better food. I counted calories and ran a deficit and it worked. I had a goal in mind based on Matt Fitzgerald’s Racing Weight program and steadily worked towards it. Even bought a fancy-schmancy body fat scale and everything.

But along the way we noticed something. Feedback from the scale on any given day was not consistent or reliable. If you’re trying to lose 1-2lbs a week and weighing yourself with a weekly check-in, the random nature of a single weigh in could make you look brilliant or like a total failure. You could run a 5,000 calorie weekly deficit and have the scale tell you you gained a pound. There’s a lot of noise in your daily body weight. Water, salt, hormones; there’s just too many factors to reliably trust the number on any single day. So you really have two options: ignore the number on a given day and trust that your plan is really working or weigh yourself more often, generating more noise but finding some sort of average over time. (Of course I resolved this by plotting a trendline of my weight in Excel and focusing on the slope, but that’s me).

We were discussing this phenomenon last week and I told my wife that I am going to start selling a scale that doesn’t tell you your current weight, but reports a 14 day moving average and the directional trend of your weight. That way you can eliminate the noise (or at least reduce it significantly) and not be easily discouraged from your goals. When you get noise instead of signal from the scale, it’s defeating. Why did you bother restricting your diet and feeling hungry if you aren’t going to make any gains anyhow? The doubt creeps in and you assume you’re doing something wrong, that the system isn’t working.

Sound familiar? Think about how much noisy feedback we get as investors. Checking your portfolio or the market on a daily basis is like getting on the scale every 20 minutes and expecting progress. Even in quarterly and annual returns there is going to be a lot of noise! Tons of noise. I joked with a client last week that if I could I would get clients to agree to only review portfolio performance every five years. The fact is that performance in short and even intermediate periods isn’t how most of us should judge our success as investors. Your investment “scale” should report things like:

  1. Did you invest and rebalance according to your IPS?
  2. Did you avoid panicked or greedy behavior?
  3. Did you stick to your savings/spending plan?

We in the business love to talk about process over performance too often, but there’s a reason. Outcomes, measured by performance, aren’t really in your control. You can do everything right and have a down year, or just underperform the S&P 500 because of your asset allocation decisions. You can go a decade (GULP) underperforming somebody else’s portfolio for these same reasons. That shouldn’t worry you. If you go a decade underperforming because you changed strategies four times and fired three advisors and chased some biotech stocks and dumped commodities at the bottom, you desperately need help.

So find a way to separate the signal from the noise in your evaluation. Review your process and how you worked it before you review your performance. Don’t focus so much on the numbers on the scale and spend more time making sure you have a solid plan in place to get where you want to be.

 

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