The Ulysses Strategy (Ulysses is the Latin name for Odysseus) is a method financial planners developed to keep savers and investors from listening to the sirens’ call that could wreck their financial ship.
In “The Odyssey,” the great adventurer Odysseus spends ten years trying to get home safely from the Trojan War. Near the beginning of his journey, he sails past the island of the Sirens who sing so sweetly sailors wreck their boats on the island and die listening to the music.
Odysseus wants to hear the song, but he also wants to make it home, so he plugs the ears of his sailors with wax and has them bind him to the mast of their ship. As they sail past, he begs his men to set him free, but they follow his previous instructions and bind him harder till the beckoning danger passes…
To be continued… (Skip to end of article to see what happens…)
Prospect theory is a behavioral model developed by Nobel Prize winners Amos Tversky and Daniel Kahneman. It proved that people very often make irrational decisions when faced with choices that involve risk, reward and uncertainty. (Like the sailors being called to certain death by the sirens.)
Economists and financial planners (and maybe even you) now more easily recognize that people make predictable mistakes when faced with hard money choices. Those mistakes come from emotion-based decision making.
It goes without saying that money is a very emotional issue, one that touches all the major feelings: greed (obviously), but also jealousy, regret, embarrassment and fear.
Tversky and Kahneman found that fear of loss will often make people overestimate the amount of risk they face. And the desire for gain make them underestimate risk.
Fear: A common example of the prospect theory in action is panic selling in a falling stock market. You may have seen this behavior just this year as friends and neighbors sold stocks in March to avoid larger losses.
Greed: And it works the other way around too. When markets and home prices are going up, up, up, people are likely to make bad decisions and take on too much risk.
Emotions — especially fear and greed — are the siren song of saving and investing drawing you to crash your boat on the rocks of unrealistic hopes for gain and panic selling to avoid loss.
Emotions, for better or worse, are the window through which we see the world. There’s no way to get rid of them, and if you did your life would be pretty gray! But using the Ulysses Strategy, you can tie yourself to the mast — tame the power of your emotions — to get the positive outcomes you want and avoid negative consequences for your nest egg.
Here are a 5 techniques to help you control fear and greed and enable you to sail toward your retirement destination:
Ultimately, the Ulysses Strategy is about tying yourself to a ship that already has its route planned out and not putting your hand on the tiller either out of greed or fear.
Maintain a Retirement Plan: A retirement plan is your guide to long term wealth and security. You want to have a comprehensive plan that is flexible and takes into account many variables and possibilities. The NewRetirement Planner enables infinite scenarios and guides you toward how to better with your time, taxes, investments, healthcare and more.
Let your plan serve as your north star and if you are faced with needing to make a big financial decision. Try it out in your plan and first really see what will happen.
Create and Follow a Strict Plan for Investments: An investment policy statement is a document that outlines your investing goals and strategies for achieving those goals. Most importantly, it describes a framework for making changes to your plan and gives you options for what to do if things don’t go as expected.
By thinking through what actions you will take in various scenarios, you can reduce the emotional impact in the heat of the moment.
Next, you have to make a contract with yourself to stick with the plan no matter what.
Ulysses didn’t get past the sirens on his own. He could not have done it without the support of his crew.
Having a trusted financial advisor can be an invaluable crew supporting you in your quest for wealth and security. An advisor can help you make rational decisions.
Write up a contract with yourself that requires you to get a second opinion before you make any big, consequential financial decisions.
NewRetirement can match you to a Certified Financial Advisor that uses the NewRetirement Planner to enable better communications and a collaborative advisor/client relationship. You will get fiduciary advice at a much lower than average cost and benefit from the reassurances and guidance you need to stay the course!
Ulysses figured out how to listen to the sirens’ song. And you can figure out a way to take risks without wrecking the ship too.
For example, you probably shouldn’t maintain all of your money in a cash account. And most of us should not invest all of our money in risky stocks.
However, investing some money conservatively and some money more aggressively is a sane approach if you understand your goals, time horizons and risk tolerance.
Get more sane investing ideas with 28 retirement investing tips from today’s financial geniuses.
Before you take any big financial action, sit with your emotions. Ulysses understood what he was feeling and created a plan of action for dealing with his emotions.
As Franklin Roosevelt famously said, “the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
Break down that “nameless, unreasoning” fear into its different components. What exactly are you afraid of? Is it a problem that has to be addressed today, or can you wait and gather more information?
Before you pull the trigger on a large, potentially damaging decision, like liquidating your investment portfolio or taking a loan against your 401(k), take these three steps to slow down your thinking and eliminate choices based on panic:
- Name the Emotion: Put a name to the emotion you’re feeling. Better yet, see if you can put several names to it. Are you worried about being able to pay bills, or are you afraid you won’t be able to support your current lifestyle in the future?
- Feel It: Once you have broken down the components of your feelings into something nameable, allow yourself the space to feel those emotions. Rationalization is a process of denying your emotions. Working through your emotions means acknowledging their source so you can make a plan to deal with them.
- Take Positive Action: Once you have processed your emotions, you can act on their causes. What productive behaviors can you take now to start to fix the issue? It could be eliminating the vacation line in your budget, or it might be taking a loan against your 401(k). Whatever you choose to do will give you greater confidence if you fully understand how that decision will affect your emotional state once it’s done.
It’s not realistic to think you will turn off your TV, close all the apps on your phone and stuff your ears with wax for the rest of your life. Odysseus went through the trouble of having himself tied to the mast of his ship (probably very uncomfortable) because he wanted to hear the Sirens’ song.
You can get a lot of enjoyment thinking about how to manage your money and how you’d like to spend it. The key is to focus on the positive while minimizing the negative.
Financial advisors have a test to help them calibrate your appetite for risk, and many of them have online tests to help you find your score. It’s important to note that you have two “settings” for risk tolerance: a financial setting and an emotional setting.
Emotional Risk: Your emotional risk tolerance may determine whether you invest in individual stocks or mutual funds.
Financial Risk: Your financial risk tolerance, on the other hand, is the amount of money you can lose before you have to make drastic, painful decisions.
Once you identify your risk tolerance, it’s important to accept what that means. If you want less risk, you have to accept less reward. That means adjusting expectations around income and what you can afford in your budget.
The other side of the emotional coin is finding the joy and purpose in your motivations to save and invest. Fear not only decreases your life satisfaction, it also will bring you suboptimal returns. If someone is so afraid of risk in the stock market that they keep all their savings in cash, they will overlook the risk of inflation and will end up worse off than if they had accepted a larger risk.
As you probably know, Odysseus made it back to Ithaka, his home island, after ten years of war and ten years of wandering. The end of the Odyssey shows Odysseus’s final victory over the people who had hoped to take some of his estate, and we can imagine him retiring to a quiet, peaceful life with his wife Penelope and son Telemachus.
He got there through the most amazing trials because he had a plan and he stuck to it with dogged determination. Even as a work of fiction and myth, even everyday mortals can use Odysseus’s example to navigate uncertain waters.
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