The Floor Is (Not) Lava?

There is a new show on Netflix called “Floor is Lava”. If you’re not familiar, the saying, the game, and many variations of it have been around for a long time. You may have even played it yourself during your childhood; the game where you jump from one piece of furniture to another (or one area to another, etc.) without touching the ground. The floor is lava, after all.

Because it’s Hollywood, the show of the same name is ratcheted up with a mixture of lava-colored water and gelatinous goop bubbling beneath the players, challenging them with each misstep. This show has made my children experts on how to destroy the life of my furniture. The threat of punishment looming over their heads is no match for the opportunity of cannonballing into the sofa to avoid the dangers of the “lava” below. You can see it in their eyes when they have spotted their next route to safety. They lock in and leap — sometimes completely disregarding any concerns about the integrity of their destination (like a barstool awkwardly placed by the fireplace).

All of this got me thinking — of course, about investments. I realized that the approach contestants take to playing “Floor is Lava” are similar to how I’ve seen some people approach the allocation of investments within their 401k or employer-sponsored program.

“The Floor is Lava” approach

Here are the types of investors that really stand out when I think about the similarities to the game and show:

1. There’s the investor that never really leaves the starting spot because they fear to lose the game. This investor takes the ultra-conservative route that has the smallest amount of risk, but in turn, the smallest probability of reward.
2. Then, you have the investor who goes fast for the “win.” They look at the funds that have reported the biggest return over the last couple of months and continue to shift their investments into those funds.
3. Finally, the investor who sees what everyone else is doing and follows in lockstep, adjusting their allocations to match. They are often assuming that their coworker knows something they don’t. (Which may be true. Many people know things that I don’t, just ask my wife.)

401ks – not as simple as lava avoidance

The overarching danger in each of these approaches is that the investment strategy is not formulated properly to fit each investor’s complex sets of needs. They are built on emotions rather than the facts. While “avoiding the lava” is generally a good thing, it’s not as simple as that when it comes to an investment plan. Here’s examples of what could happen in each of the scenarios we described above:

1. By avoiding the potential of loss at all costs, investors can lose out on opportunities and extend their time until retirement.
2. By chasing gains, investors often end up buying high and selling low, again losing out on opportunities and extending time until retirement — or exposing them to unnecessary risk.
3. By copying another co-worker’s plan, investors are choosing someone else’s risk profile rather than their own, meaning their retirement plans may not be well adjusted to their own life situation.

Further compounding the issue, it’s often the case that the advisors working with a specific company’s retirement plan are not meeting individually with each participant to tailor their plan to their needs. That’s not a knock on my advisor brother and sisters out there —  in these situations it’s not often an easily achievable task.

Two strategies toward a brighter future

So what to do? My first recommendation is to find a personal financial advisor that is able to work with you one-on-one to pursue your goals through coaching and planning. I would encourage a conversation at the very least; this way, you can see if there is something for you to learn.

However, many investors like doing things themselves. Many 401k providers have research and tools to assist participants available through their online account page. The content there is designed to provide education and give investors a place to start creating a portfolio to fit their needs and risk tolerance.

The financial industry is making efforts to encourage people to save and lower the barrier to entry more now than ever before. However, the important piece for many investors will be their employer-sponsored plan; it often makes up the largest share of retirement savings.

This is why it’s so important for investors to look beyond “floor is lava” and work on a 401k investment plan that truly fits their own individual retirement goals. I’m happy to answer any questions you have if you’re thinking of taking a new approach.

August 2020