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Why Your Instincts Are Hurting Your Investment Returns?

By Posted on In Finding Confidence, Investment Behavior, Uncategorized

Imagine your reading this post in a busy coffee shop. All of a sudden you look up and see people running out of the shop. What do you do first? Chances are, you get up and follow everyone else. You might not even know what’s going on at first. Are you getting away from a dangerous situation, such as a fire in the coffee shop? Or is everyone running toward something or someone, such as a celebrity?

This is an instinctual reaction. There is perceived safety in numbers. It goes back to some of the earliest known ancestors and can be seen in many animal species today.

If we dig into this a little deeper, it’s actually a mental short-cut (technically called a “heuristic”) . In the coffee shop example, you didn’t have time to take stock of the situation to understand what’s occurring. Instead, you relied on actions of others and assumed they were making the right decision. It worked well for our ancestors and it continues to work well for us today. Except….

Except for when it comes to investing. Assume you’re watching the news and all everyone is talking about how XVZ stock is doing “great” and “everyone” is buying it. Unfortunately, the average investor will want to get in on it. They follow the hearding behavior of others and buy XYZ simply because “everyone” else is doing it.

That’s precisely the wrong time to be buying a stock, yet it’s so difficult to overcome this instinctual response. This is even more difficult when stock prices are declining and investors hear about so many people selling out of their investments. The instinctual response to follow the crowd kicks in. The investor will feel better and maybe safer knowing they are doing what everyone else is doing. But evidence clearly shows it to be a poor decision to follow the heard of other investors.

This is an example of our instincts working against us. Instead of reacting to the news, take a minute to take stock of the situation, assess what is going on, consult with your financial advisor, and understand how your decision to buy or sell an investment will affect your likelihood of reaching your financial goal.

Comparing Chess To The Stock Market And The Election

By Posted on In Finding Confidence, Investment Behavior, Politics & the Economy, Uncategorized

The average chess player can see 1-3 moves ahead in a game of chess. But a grandmaster chess player can see 10 moves ahead and sometimes up to 20. More interestingly, when they look at the board they see shapes and patterns not number of moves.

Playing chess is like connecting the dots between the stock market and the election. The media, think tanks, special interest groups and the talking heads are focused on the implications of the election on the stock market and the economy. If Trump is elected, the pundits are predicting one outcome and comparing it to the hypothetical outcome if Clinton wins.

They try to paint a very clear, logical picture of the how one policy will help America and the economy. But the oversimplification does not properly consider the hundreds or thousands of variables that affect the economy or stock market. While these experts try to account for as many variables as possible, it’s simply impossible for them to do so with any sense of reliability or accuracy.

These supposed experts see one set of moves and believe that’s how it will play out. If they were playing chess, they would be an amateur chess player who could only see the logical progression of their agenda if their opponent performed exactly as expected. And when their opponent did something unexpected (which usually happens), their plan would be thrown out the window.

When it comes to listening to these experts talk about the effects of the stock market as a result of the election, keep in mind that there are thousands of variables that will affect the stock market. In fact, there is a lot of research that suggests the election has no effect on the stock market in the long term.

Why Your Instincts Are Hurting Your Investment Returns?

By Posted on In Investment Behavior, Uncategorized

Imagine you’re reading this post in a busy coffee shop.  All of a sudden you look up and see people running out of the shop.  What do you do first? Chances are, you get up and follow everyone else.  You might not even know what’s going on at first.  Are you getting away from a dangerous situation, such as a fire in the coffee shop?  Or is everyone running toward something or someone, such as a celebrity?

This is an instinctual reaction.  There is a perception of safety in numbers.  It goes back to some of our earliest known ancestors and can be seen in many animal species today.

If we dig into this a little deeper, it’s actually a mental short-cut (technically called a “heuristic”) .  In the coffee shop example, you didn’t have time to take stock of the situation to understand what’s occurring.  Instead, you relied on actions of others and assumed they were making the right decision.  It worked well for our ancestors and it continues to work well for us today.  Except….

Except for when it comes to investing.  Assume you’re watching the news and all everyone is talking about is how XVZ stock is doing great and how everyone is buying it.  Unfortunately, the average investor will want to get in on it, too.  They follow the hearding behavior of others and buy XYZ simply because everyone else is doing it.

That’s precisely the wrong time to be buying a stock, yet it’s so difficult to overcome this instinctual response.  This is even more difficult when stock prices are declining and investors hear about so many people selling out of their investments.  The instinctual response to follow the crowd kicks in.  The investor thinks they will feel better and maybe safer knowing they are doing what everyone else is doing.  But evidence clearly shows it to be a poor decision to follow the heard of other investors.

This is an example of our instincts working against us. Instead of reacting to the news, take a minute to take stock of the situation, assess what is going on, consult with your financial advisor, and understand how your decision to buy or sell an investment will affect your likelihood of reaching your financial goal.

The Secret to Growing Your Retirement Account

By Posted on In Finding Confidence, Investment Behavior, Investment Strategies, Retirement, Uncategorized

Stay the course. That’s the secret.

The pain we experience when we see the account balance drop is much greater than the joy we feel when we see the account balance increase by the same amount. Imagine you have a retirement account with $500,000 in it and it declines by 20% to the end the month at $400,000. That can be scary – you’ll most likely question your allocation and investments. Unfortunately and in too many cases that is exactly what investors do: The sell out of their losers and buy something inappropriate for themselves.

There are still many investors that are still sitting in cash after selling out of the stock market during the worst moments of the recession of 2008.

Fidelity has some data that backs up this statistic

Tracking Your Asset Allocation Across Multiple Accounts

By Posted on In Asset Allocation, Finding Confidence, Investment Behavior, Uncategorized

Recently we introduced The Money Management Tool to help clients better organize their financial lives. The tool has lots of features and we will occasional explain how some of the features are being used by our clients (or should be used) to help them reach their financial goals.

This post will deal with a prospective client who has many accounts and struggles to keep track of how they are invested.

Situation: A prospective client couple approached us looking for help managing his investments. They had multiple investment accounts held at different institutions. And in most cases, the accounts could not be moved or consolidated.

Problem: They struggled to understand what they really owned. They thought they were diversified by owning several different funds, but in reality they owned many passive index funds that tracked the same index. Even though the fund names were different, the underlying investments were all very similar.

Solution: The Money Management Tool could be used to connect all the accounts together. After establishing the connections between the tool and their accounts, they would be able to see a total asset allocation across all their account. We were then able to work with them to adjust their allocation.

asset allocation

Using The Money Management Tool: Setting a Budget

By Posted on In Cash, Finding Confidence, Investment Behavior, Personal Development, Saving, Saving for College, Uncategorized

Recently we introduced The Money Management Tool to help clients better organize their financial lives. The tool has lots of features and we will occasional explain how some of the features are being used by our clients (or should be used) to help them reach their financial goals.

This post will deal with prospective client who needed some help staying on budget.

Situation: A young couple with two children asked us for guidance on getting a handle on their debts. They had multiple credit card balances with obscene interest rates, a result of unexpected bills. They were spending more and more of their income to make debt payments instead of saving for retirement. They were slowly realizing that they would not be digging themselves out of debt anytime soon and needed a plan to get back on track to save for retirement.

Problem: During the initial meeting, we discovered a significant amount of their take-home pay was going toward non-essential expenses, such as the most premium cable package available and eating out for lunch every single day.

Solution: Directing savings originally intended for retirement to pay down credit card debt is an acceptable strategy in some cases. But when there is a lot of non-essential spending occurring, a tightening of the belt should be the first strategy. In this case, the client could connect their credit card account to The Money Management Tool and analyze their spending habits to see just how much is spent on restaurants and entertainment. They could then develop a budget to help them stay on track.

budgeta

If you or someone you know needs help getting their financial house in order, this tool can help.

Contact us today to get started.