Keeping your wits about you…when things are going great!

07/30/25: In our April newsletter, we were counseling clients on the need to keep their wits about them as the market was experiencing back-to-back drawdowns.  But, alas,

our great clients know the game and we fielded very few phone calls about this issue.  We attribute this mostly to our great clients, with a wee bit of help from the education process we take clients through at the inception of our relationship about the behavior of markets. We review the rationale behind the various portfolio asset allocations we present to them, and the trade-offs inherent in accepting diversifying away from being 100% invested in a single market.  However, in this environment (new market highs almost weekly), we face a different dilemma…risk tolerance drift. 

This leads me to share one of my favorite authors, Dr. Terry Burnham, author of “Mean Markets and Lizard Brains”.  Dr. Burnham combines research as a former economics professor at Harvard, real world experience from his time at Goldman Sachs, and unbelievable educational credentials – a BS in biophysics from the University of Michigan; an MS in computer science from San Diego State University; a master’s in finance from MIT; a PhD in business economics from Harvard and, (where did he find the time?) served with distinction as a tank driver in the U.S. Marine Corps. 

In his book, “Mean Markets and Lizard Brains”, Dr. Burnham explains the biology behind why the average investor is by nature, well, in all probability, a bad decision maker as an investor because of that part of our primitive brain Dr. Burnham describes as the lizard brain.  I won’t go into more details, but the book is a fantastic read, and comports with what you have been hearing for years (and find almost impossible to adhere to) from such sage individuals as Warren Buffet…”be fearful when others are greedy, and to be greedy only when others are fearful”.  Just as it is difficult to keep your wits about you when the markets are drawing down, it is equally as difficult to remember that like all good things, the new market highs will in all probability, come to an end, and end with a drawdown.   Our backward-looking primitive lizard brain extrapolates that our future will be our most recent past.  So, during periods of strong markets, our brains think (with a big shot of hope) this will be our forever future, and it easy to allow your risk tolerance to drift higher, and concurrently the desire to shift your investing to be more aggressive, when the right course of action is to adhere to your baseline risk tolerance level needed for managing your emotions when the inevitable market retreat happens.  Do not fall into the emotional trap of letting near term events affect your long-term goals.    Let’s plan accordingly. 

As always, we are grateful for your business and friendship.

We are, sincerely yours,

Dave & Drew