Author: b2

The brain has a lot of gray matter but hates gray areas – uncertainty. As a planning machine, the brain needs information that is certain so it can figure out the best course of action. And when we don’t get certain information, we get agitated. Perhaps you have said, “I don’t care if the news is good or bad, just tell me what it is. Not knowing is the worst.”

Probability Problem

Whenever there is uncertainty (almost always) we must rely on probabilities to help us make the best decision. But considering probabilities requires a lot of thought and analysis. It means we have to think statistically, which most of us prefer not to do. Instead, we simplify probabilities whenever possible.

Remember the election of 2016? It was said that the election polling was wrong because Trump won. But the polls were giving Trump a 28% chance of winning. The problem was that our brain took that probability and simplified it to zero.

We all want to know what is going to happen in the markets. In the face of uncertainty, we seek out some degree of certainty – even an illusion of certainty. We are attracted to forecasters and market experts who will tell us what is going to happen. And we confuse their popularity and confidence with their ability to predict the future.

Investing Takeaway

The truth is we can think of a lot of things that have occurred that cause investors and “experts” alike to scratch our heads. Surprises and uncertainty are just about the only certainty in the financial markets.

We can’t control the markets or the economy. We can’t rely on expert forecasts, no matter how confident they sound. Even those forecasts with low or high probabilities aren’t sure things – sometimes the unexpected happens.

But we can control how we respond…the choices we make. A financial plan provides guidance and structure. It needs to be coupled with a behavioral plan – how we will respond to the uncertainties and surprises. That’s what I am here for. Let’s focus our time and energy this election season on those things we can control – the financial and behavioral plan.

– Scott

©2020 The Behavioral Finance Network. Used with permission

As we enter emotionally charged presidential campaigns, we should prepare ourselves for an onslaught of pessimism. Election talking points tend to be more slinging mud about the other candidate than a candidate’s outline for future prosperity. Why do they focus so much on the negative?

The bottom line is that pessimism is an effective communicator. It results in a greater emotional response, which gets us to tune in and makes information easier to recall. You better believe politicians want us to tune in and remember their message – so really it is a way to be more effective.

Pessimism is also influential because it relies on more immediate need than optimistic viewpoints, which often take a longer time to unfold. “Policy XYZ must be changed right now or else something really bad is going to happen.” Any sense of urgency, even if it is just an illusion or “fake news”, gets us to tune in.

So, how can we rise above the negativity? There are two ways to help us avoid getting caught up in the pessimism and negativity we find all around us. One is an avoidance strategy; another is filtering the information.

We can avoid the negativity by simply turning it off. Taking a break from social media and avoiding sources that get you emotionally charged may not be easy but are effective “strategic ignorance” strategies.

We can filter the noise by changing our time frame. Since negativity and pessimism is most influential over short periods of time, we can filter it by focusing on long-term outcomes. Sure, we may make policy mistakes in the short term, but we will correct them and make adjustments to achieve prosperity in the long term. This strategy can help us remain mentally sane and financially rational.

Investors that are influenced by short-term market moves can easily get caught up in it all. Those who focus on the long term don’t care if the market goes down X% over the next few months because they are looking far beyond that. This is one reason why I implore you to take the longer view – it’s better for your psyche and encourages more thoughtful and deliberate financial decisions.

©2020 The Behavioral Finance Network. Used with Permission

As we face increased uncertainty about our lives, work and the markets, it can be easy to become anxious and fearful. We may face more surprises as we learn to live with the pandemic and figure out how to manage the economy through this.

The best way to prepare ourselves and combat feelings of fear and anxiety is to focus on important truths that are constant in our lives, regardless of what goes on around us.

I share with you three important truths with respect to investing. There is a lot we don’t know, but there are several constant truths. And if we focus on those truths, we can be in a better position to make thoughtful and wise financial decisions.

• The Media Sensationalizes the News. They need to in order to make money. It’s often urgent (breaking news), it’s about getting us emotional. If they were to deliver news in an unbiased, factual manner, few would tune in. Given this fact, we have to ask ourselves why we even tune in. Yes, it’s good to be informed. But not when the information is skewed and may influence us to make unwise decisions.

• Investor Behavior > Investment Knowledge. How you behave and respond to news and market movements have a much greater impact on your wealth than market knowledge. Spend more time thinking about your actions and reactions to market events. Afterall, it is your financial decisions that directly impact your wealth.

• Investor Behavior is Predictable. Because thinking and responding are largely habitual practices, investor behavior is quite consistent. Voltaire said, “History never repeats itself, but man always does.” As emotional beings, we overshoot both on the upside and the downside. Our moods and limited views drive most of our decisions – which is why investors often make the wrong decision at the wrong time. Individual investors can improve their investment behavior by learning correct perceptions and following a set of investment rules, but those require effort. We will do that, but the majority of investors will not.

My goal is to be a constant reminder of those things we need to pay attention to, and those things we need to ignore. There is so much noise out there. The anxiety and fear that is permeating our lives is very real. But it need not affect you. Let’s talk about what truths, both personal and financial, you can focus on to get you through this most difficult time. I am here for you.

©2020 The Behavioral Finance Network. Used with permission

We are halfway through the year, and already people say “good riddance” to 2020. This has been a difficult year!

There is uncertainty about how the pandemic will play out and whether we will go back to “normal” ever again. There are many important events and future outcomes that are outside of our individual control.

Trials are always painful to go through. But there is little human progress without trial. It’s like the dumbbell we use to strengthen a muscle. Trials have the potential to strengthen us and help us become better and more capable than we thought possible. They are the refiner’s fire.

While we may not be able to control the trial itself, we have significant control over how we respond and what type of person we become.

So how do we do it? It’s all about what purposeful habits we create. I am not referring to existing habits we do without thinking. I’m talking about purposefully doing specific things each day so that they become habits, and ultimately become our identity.

What character trait do you admire in others that you want to develop? Maybe you notice a friend isn’t as bothered by what’s going on and has a great sense of peace. Find out what that person does. Speak with a religious leader. Research what psychologists say can help you find peace. Then figure out what you can purposely do each day to develop such quality.

One of the most challenging things about New Year’s resolutions and habits in general is that they take a long time to cultivate. A lot longer than 30 days or even 90 days. A habit is not about crossing a finish line; it’s about changing who you are. Your future self is largely dependent on the purposeful habits you do today, tomorrow and every day thereafter.

Several years in the future, when telling your story of 2020 to your kids or grandkids, what will you say about 2020? Will it be the year you forever want to forget? Or will you tell them about the difficulty of the pandemic, but how it was a catalyst for your personal growth – that through it you became a better person. The good news is that story is 100% in your control. It’s going to be based on your purposeful habits.

2020 is only half over. There is still much to do. Make it a great year!

©2020 The Behavioral Finance Network. Used with permission

The Holy Grail in investing, if there was one, is an investment that provides equity-like returns without the discipline and stomach often required to achieve such returns. This is what every investor hopes for. We want the short cut. And Wall Street knows this!

There are investments that allege to provide growth and income while protecting or limiting the downside. As investors, one of our biggest nemesis is volatility, so these types of investments are very alluring. They tend to perform satisfactory in good markets, but they can fail miserably in bad markets – the very conditions we expect them to do well. And a few blow up completely.

Hedge Fund Example

A specific hedge fund was recently offered and purported to hedge against a downturn. They said the investment would protect investors from catastrophic shocks. It was led by a very experienced team of financial professionals. Sounds like a great investment opportunity!

So, how did it do in the catastrophic loss in March of this year? It lost 97% of its value and liquidated shortly thereafter.1 If this were the only example, we could chalk it up to an anomaly. Unfortunately, these happen more than we hear about.

Mutual Fund Example

A mutual fund was marketed years ago as one that would achieve both preservation and growth. Wow, exactly what investors want! The fund’s marketing materials stated that the fund would make volatility your friend. Sounds good to me!

It did OK until we had a spike of volatility in February 2018. It was a very short-term spike, but it was sufficient to tank the fund. Over 90% losses in one month; fund liquidated.2

Buyer Beware

Risk management isn’t about finding the Holy Grail (it doesn’t exist). It is about having the right allocation for you, knowing what you own and transparency in execution. Investment success isn’t about owing the “best” fund. It’s about having the discipline to stick with your plan when times get tough.

There will always be something more attractive than what you own. Investing is a constant battle of tradeoff such as Risk/Return and Feeling/Rationality. Beware of investments that sound so good we are willing to abandon our own investment plan.

Beware of the wolf in sheep’s clothing.

©2020 The Behavioral Finance Network. Used with permission