business

GAINS & LOSSES ROSS LEVIN

When I was 15, I was having a great summer in Babe Ruth baseball.

I was really smacking the ball around the ballpark. It may have been because I got glasses and was seeing the ball better or that I was a year older and a little stronger. But if you asked me then to give a reason, I may have said it was because of the ritual I undertook when I went to the field. Regardless of the weather, I had my cap on backwards and biked about a quarter mile against the highway traffic. I made sure to not change that routine and I went the summer without a slump.

Yes, this is completely stupid. The direction of my hat or bike did not cause me to play better baseball. But this is no less stupid than the various reasons the experts insist on giving for why the stock market was up or down on any given day. Markets are complex, adaptive systems so there can never be a single reason for the market's performance.

Yet, according to the book "The Invisible Gorilla,'' authors Christopher Chabris and Daniel Simons show "in chronologies or mere sequences of happenings, we assume that the earlier events must have

caused the later ones."

We overestimate causality all the time in our lives. Many clients are overly concerned with their boomerang kids returning to their homes after graduating college. The causes for this are obvious: We overindulged our children when they were little, made life so great for them that home is the most comfortable place for them to be, and taught them to rely on us when things are difficult. Our generation couldn't wait to get out of the house, and it seems that this generation can't wait to move back in.

But this logic is flawed. There are also many kids who came from similar environments who now are out on their own. There can be a number of reasons for this apparently recent phenomenon. We tend to live in larger homes than our parents may have had so there is room for the kids to return. The job market is terrible, so hardworking kids may be doing anything they can for way less money and are being smart to conserve until they can find something in their field. And the housing market is more expensive than it was, so it takes longer for kids to get on their feet.

I suspect that many adult children at home would rather be supporting themselves. So rather than torture yourself for your lax parenting or criticize your kids for their lack of ambition, accept the situation as is and confront it. Establish rules of the house regarding shared work. Determine how much the child should contribute for rent or food. Help your children set appropriate goals regarding finding part-time or full-time work. One of our clients required their child to not only get a part-time job, but also to set up a certain number of informational or actual interviews each week until he could find meaningful employment.

Chabris and Simons also point out how we are attracted to those people who exhibit confidence in their convictions, even though they could be frighteningly wrong: "The illusion of knowledge persists in part because people prefer experts who think they know more than they really do."

When you are working on your financial plan, you must have a collaborative relationship with your financial planner. We had a prospective client come into our office who felt he had been so burned by the market that he wanted to simply turn everything over to us. While it is easy to understand those feelings, it is critical not to succumb to them. Your financial planner should be regularly working with you. Your situation is constantly changing and, even more important, your feelings about your situation evolve over time.

Most of us don't accurately recall the past. Our brains are not hard drives that store information. Instead they store our narratives about what happened. Each of us has a story about how we handled the market turmoil in late 2008 and early 2009. But these are just stories. We simply cannot accurately recreate what we experienced during the day-to-day tumult of the market. Yet this volatility should serve to help shape future decisions. Using an adviser to create an investment program that matches your future needs with your capacity to accept volatility requires ongoing joint work and adjustments.

Financial slumps are unavoidable, but planning for them and reacting to them is better than vainly looking at a reason to explain them.

Spend your life wisely.

Ross Levin is the founding principal and president of Accredited Investors Inc. in Edina. He is a certified financial planner and author of "The Wealth Management Index." His Gains & Losses column appears on the fourth and fifth Sundays of the month. His e-mail is ross@accredited.com.