Despite the research and due diligence necessary in developing an investment portfolio, investors are frequently influenced more by their own emotional and behavioral biases than by data.1 These biases may include overconfidence, regret, impatience and the desire to “keep up with the Joneses.”
In fact, personnel from at least one asset management firm believe that the company has a better chance of outperforming the market by anticipating investor behavior. At a macro level, the behavioral biases of a large number of investors may be able to influence the expectations of company performance and even its stock price. By tracking patterns among such biases, it may be possible to capture a higher return on investment relative to other market fundamentals.2
Although there may be truth to that, we believe that investment selection should be based more on individual goals than on mass market speculation. As financial advisors, we help clients get to the crux of their objectives and design a financial strategy around their long-term goals, timeline and tolerance for risk. Markets will always fluctuate, regardless of the impetus, but our job is help reduce the impact of behavioral biases and help keep your financial strategy on track. Please contact us if you’d like to learn more.
Within the study of behavioral finance are subfields. For example, biases can be cognitive, meaning an investor may think and act in specific ways or by following a rule of thumb. A behavioral bias also can be emotional, relying on feelings rather than information. An example of this is “self-attribution bias,” wherein investors tend to believe their investment success comes from their own actions but blame poor performance on external factors.3
Cognitive biases often are characterized by the inability to fully process statistical information or by memory errors.4 In some cases, cognitive bias manifests in simply not acknowledging when there is too much information for a person to process. In this scenario, it is common for an investor to cling to the original reason he or she made the investment -- even when presented with new and potentially damaging evidence.5
Another common investing behavioral bias is an aversion to loss. In fact, investors are generally more afraid of losing money than they are of embracing the thrill of stock market success. This inherent fear of loss can, in fact, make an investor unwittingly more conservative than he needs to be or, depending on financial circumstances, should be.6
1Tim Parker. Investopedia. “4 Behavioral Biases and How to Avoid Them.” Accessed Jan. 5, 2018.
2John R. Riddle. 361Capital. “Bounded Rationality: Tapping Investor Behavior to Source Alpha.” Accessed Jan. 5, 2018.
3Brad Sherman. Investopedia. April 12, 2017. “8 Common Biases That Impact Investment Decisions.” Accessed Jan. 5, 2018.
4Peter Lazaroff. Forbes. April 1, 2016. “5 Biases That Hurt Investor Returns.” Accessed Jan. 5, 2018.
5361Capital. “Behavioral Finance Basics.” Accessed Jan. 5, 2018.
6 Peter Lazaroff. Forbes. April 1, 2016. “5 Biases That Hurt Investor Returns.” Accessed Jan. 5, 2018.
It can be difficult to make financial decisions without access to information. If you have questions or concerns about your current retirement strategy, feel free to contact us using the form below.
Strategic Wealth Designers, LLC is a Registered Investment Advisor in the states of Kentucky and Indiana. Matt Dicken, Dustin Stanley and Jordan Schwartz are Investment Advisory Representatives affiliated with Strategic Wealth Designers, LLC. The advisors may not transact business in states where they are not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.
*Guarantees provided by insurance products are backed by the claims-paying ability of the issuing carrier.
The retirement kit is provided for informational purposes only. It is not intended to provide tax or legal advice. By requesting this report you may be provided with information regarding the purchase of insurance and investment products in the future.