Investor Behavior: If Pete Carroll Had A Decision Policy

The NFL delivered an exciting finish to the 2014 Season on Super Bowl Sunday. The defending champion Seattle Seahawks battled the New England Patriots right down to the wire. New England however, much to my dismay, managed to emerge victorious partly due to a controversial play call at the end of the game by the Seattle Seahawks coaching staff. 

Needing a touchdown to take the lead with 20 seconds left in the game, Seattle was on the New England 1-yard line. Instead of leaning on the strength of their offense by running the football, they decided to throw a high risk pass which turned into an unfortunate game winning interception for New England. 

The Seattle head coach, Pete Carroll, was asked why he made the risky play call and his answer was less than satisfactory. He said it was a judgment call based on running some time off of the clock to set-up the next couple of plays which were going to be more conservative running plays.

As humans our biology often works against us by getting in our way of our ability to assess risk. In the case of Pete Carroll and the Seahawks his failure to have a system in place to drive his in-game decisions potentially lost his team the Super Bowl. 

This is no different than our own ability to assess risk in the capital markets and in our own investment portfolios. In times of stress and uncertainty our decision making process is often compromised. As a result we rely on our gut feelings and our own judgment to make decisions. For example, when certain asset classes in our portfolios are out performing others, we often feel the urge to move all of our money to those hot asset classes – taking unnecessary risk.

Carl Richards, a contributor to the New York Times, writes in an article about irrational behavior and investing that even Warren Buffett understands his own irrationality and builds systems to cope with it.

How can we build a system to cope with our own emotions in making financial decisions?

The answer is not investing in complicated annuities or surefire “guaranteed” investments – but instead creating a policy driven process to help us make decisions. At Highland Financial Advisors, we use what’s called an Investment Policy Statement to place an investors goals at the forefront of a structured decision making process.

To elaborate, Investment Policy Statement establishes the investor’s expectations, objectives, risk/return profile, time horizon, and guidelines for the assets that are to be invested in the portfolio. It goes as far as to outline the investment philosophy, management procedures, and appropriate asset mix to achieve the investor’s goals and objectives.

If the Seattle Seahawks coach, Pete Carroll, had a system in place to cope with the decision making process in such a high pressure situation would the outcome have been different? We will never know for sure. What we do know is being prepared and having a flexible process in place to cope with all different scenarios is critical to the success of any plan.

Don’t make a judgment call with your investment portfolio. Here is a list of steps to take in building an Investment Policy Statement:

  1. Assess your financial situation by identifying your goals and needs.
  2. Determine your tolerance for risk and your time horizon.
  3. Set long-term investment objectives.
  4. Identify any restrictions on the portfolio and its assets.
  5. Determine the mix of asset classes appropriate to maximize the likelihood of achieving the investment objectives at the lowest level of risk.
  6. Determine the investment methodology to be used with regards to investment selection, rebalancing, buy-sell disciplines, tax loss harvesting, and asset location.
  7. Implement the decisions.

Click here to read the NY Times article with more on this subject.