The Waiting Game

I read about this incident in the Guardian, so I am taking it to be true. Some years back, authorities at a Houston airport in the USA, faced a troubling customer-relations issue. Passenger complaint volumes were increasing about the long wait time for baggage claim.

In response, airport authorities increased the number of baggage handlers hoping to solve the issue. As a result, the average wait time to claim baggage fell to 8 minutes, well within industry benchmarks. But the complaints continued.

Confused, airport authorities undertook a root cause analysis by initiating a thorough on-site audit of the journey from exiting the plane, to collecting baggage. The findings: It took passengers only 1 minute to walk from the arrival gate to baggage claim, but an additional 7 minutes to collect their bags. As a result, a majority of their journey was spent waiting.

The solution: Airport authorities moved the arrival gate further away from the main terminal, and then routed the bags to the outermost carousel belt delivering passenger luggage. Now passengers spent a total of 6 minutes walking and spent just 2 minutes waiting for their bags. Complaints immediately dropped to zero.

Why did passenger complaints stop?

It all comes down to perception. The time people spend waiting for their bags feels much longer, so much so that people routinely overestimate the amount of time they spend waiting. The time people spent walking from the arrival gate to claim their baggage feels much shorter for passengers, because the mind is occupied on walking. Most importantly, the walk from the gate to the carousel is perceived as an intended part of the process, not an inconvenience. The pain is the waiting. The walking is not?perceived?as painful.

Waiting and Tinkering

Waiting in a traffic jam or standing in a long queue that just doesn’t seem to move forward, are familiar examples in everyday life where the pain of waiting is exaggerated for most people.

Waiting is never easy for the best of us. Waiting for our efforts to yield results or waiting for our investments to yield results requires patience. Since most of us lack patience. We cope by tinkering so that we may have the results we seek beforehand. Tinkering is defined as “to try to repair or improve something without having the proper skill or knowledge.”

Tinkering with our investments may have unintended consequences. The fund we invested basis the fact that it was the top performing fund last year may this year be out of the top funds list. So, you tinker and redeem the fund at the end of 1 year (even though you had invested keeping a 5-year time frame in mind). You take out the money and invest in the new top performer fund everybody is talking about. One year later, the top performer fund is not performing as expected. So you tinker again and the cycle continues. As long as equity markets are performing well or touching new highs, the tinkering may only result in sub-par returns. However, when the tide turns, sub-par returns may turn into losses. Recovering from losses can be difficult.

Climbing out of the Hole

Here are how losses can create a hole in your investments. Suppose you hold a fund that falls 20% in value. How much does that fund have to gain before you're back where you started? Many people instinctively say 20%, but that's wrong. If the fund's purchase price was INR 100 and loses 20%, it's at INR 80; from there, gaining 20% would put it only back up to INR 96. To get back to INR 100, the fund would have to gain 25%. Larger the loss, more dramatic is the recovery required to get back to where you started. So, if your fund falls 50% in value, it will have to gain 100% to get back to where you started. While the fall may be swift, the recovery takes time considering the magnitude of the fall.

In conclusion, take time understanding the fund before investing in it. Set a realistic time frame for when you would like to see your investment bear fruit, preferably align it to a goal. Use some basic thumb rules for long-term return expectation: 6-8% p.a. for Debt Funds, 8-10% p.a. for Hybrid Funds, 10-12% p.a. for Diversified Equity Funds. Review the performance against your goal and the fund benchmark performance. Take corrective action if necessary. But avoid tinkering with your investments to cater to the flavor of the season fund. Remember seasons come and go, but your goals grow closer with every passing day. It pays to play the waiting game with patience.

Source: The Guardian Newspaper

Author: Ashish Joseph George, MMS, CFP. The views shared in this article are my personal views and don’t reflect the views of any organization. This is not an investment advice.