Why Emotional Decisions May Be Ruining Your Investment Return

Choppy markets can lead to emotional decisions. How do you keep your actions in check when emotions are running high? A recent J.P. Morgan Market Insight shared the following observation, “While institutional investors typically follow policy targets, which naturally enforce disciplined investing, retail investors face behavioral biases that often stand in the way of optimal decision making.  Overcoming behavioral biases requires discipline and guidance, but it may help investors generate more attractive returns in the long-run.” In looking at the first chart below from J.P. Morgan, you will notice that retail investors (the “do-it-yourselfers”), on the whole, are acting in complete opposition to institutional investors in the markets.  The result of these opposite actions over time is that long term returns earned by the average investor are well below what actually occurred in the markets, as can be seen by the second chart below.         These vast differences in actual returns can be at least partially explained by the way investing decisions are made in institutional environments vs. retail investors.  Rather than following regimented guidelines, individual investors subconsciously allow behavioral biases Read on! →

Two Brains May be Better than One When it Comes to Your Family Finances

We’ve all heard of the book entitled, “Men are from Mars, Women are from Venus” by author John Gray and we’ve likely experienced major differences in how our spouses think and react during discussions.  A recent WSJ article, “Differences in How Men and Women Think are Hard-Wired” discussed the results of a brain scan study done at the University of Pennsylvania, which is showing scientists just how different the genders really are.  The brain scans show male brains have more neural connections within each hemisphere (front to back), while women’s brains have more connections between hemispheres (right to left).  These scans suggest that men may be better wired for more focused tasks requiring attention to one thing at a time and women may be better wired for multitasking and analytical thought.  While scientists continue to examine and disagree on the intricacies of the human brain, gender, and how this may ultimately translate into thought and behavior, I take a different approach to these findings. While we may not all agree on specific genders having superior abilities in particular areas, I Read on! →

How much can you stand to lose?

One of my favorite columnists is Jason Zweig of the Wall Street Journal.  His Saturday column, “The Intelligent Investor” strikes me as a straight forward, common sense view on the markets and investing.  His recent piece on buying stocks at record highs was particularly interesting because of the way he addressed the potential for loss.  As 2013 comes to a close and markets bounce around historical highs, the time may be right to reflect on portfolios, how they are allocated and how much loss can be sustained if markets retreat. As investment managers and financial planners, risk is often discussed in terms of percentage loss.  I believe discussing loss in terms of a percentage falls short of trying to help clients understand risk and the potential for loss.  This shortcoming was frequently proven during the last financial crises when clients grew anxious over dollar losses that did not reconcile with the equivalent percentage loss they said they were willing to accept. When deciding on the right mix of cash, bonds, hybrids and equities (a diversified portfolio), Mr. Zweig rightly suggests Read on! →

What really drives our financial decisions? – November 2013 Newsletter

All of us like to think we are rational beings, weighing the pros and cons of a situation and then making a well-informed decision.  What we sometimes don’t realize is there are forces at work in our subconscious which can sway us toward irrationality at precisely the wrong time.  However, if we take the time to examine what those forces are and how they affect our decision-making, we should be able to recognize and avoid some of the misdirection in our lives. Behavioral finance is a study in both finance and human behavior and seeks to understand how people make financial decisions, what factors influence them, and how to help them make better decisions.  These forces, or biases can skew our decision-making and act in such subtle ways that we may not even know they are at work.  Biases in the financial realm are particularly fascinating, as they can move entire markets or simply prevent one individual from taking the next critical step in securing their financial future.  These may be deep-rooted in our family history, cultural or religious based, Read on! →

Does Money Buy Happiness?

It is certainly fair to assume money buys happiness up to a point. We need money to cover our basic needs such as food, water and shelter. Having enough money to pay bills reduces stress and in turn increases a person’s overall well-being. Even having extra money to cover fun activities, extracurriculars, and travel will bring an individual more joy. But is there a point where one’s level of happiness levels off? Studies have shown that Americans’ levels of happiness increase as their income rises to $75,000 a year. However, beyond that, the impact of a higher income on happiness plateaus. Beyond our financial resources, it is evident that relationships, a sense of community and purpose, and our experiences all contribute to our overall well-being.  Because so many moving pieces factor into our level of happiness, it is crucial to first figure out what makes us happy and from there make financial decisions that support our values and goals. Achieving optimal levels of happiness is much more likely when we align our decisions with our values. Maybe you most value Read on! →