Category: Blog

Most investors want to find the Holy Grail of investing – an investment that provides great returns with very little (or no) risk. Many investors consciously acknowledge that such an investment doesn’t exist. But we may still be attracted to that investment because of how badly we wish it would exist. And sometimes hope and desire, unconsciously, overrule logic and rationality.

A Recent Example

A few years ago, a mutual fund was created specifically for investors who disliked volatility. They wanted to “cancel” it. The fund marketed itself as one that would “harness volatility” and “make volatility your asset.” It also claimed to be uncorrelated to traditional stocks and attempt to achieve both capital preservation and growth. Sounds like a real winner!

As you can imagine, money poured into this investment. It was marketed as the perfect investment for those concerned about volatility. It did well for a while, but it blew up in just one week. All the money was lost in less than one week! Ironically, volatility, the event the fund was going to “harness,” caused the fund to blow up.

Looking Forward

When the media reports ad nauseam on the “concern of the day,” we can deduce that someone will create an investment product or strategy to “solve” the concern. Based on current headlines, we could see investments that claim to prosper during periods of inflation, stagflation, or “overextended” markets. No matter the concern, we can assume the marketing will be very good – an emotional appeal to alleviate our concerns.

Our emotions and unconscious desires often inhibit skepticism and reasoning. Acting on emotions is the natural first response for many of us. It’s just the way we are hardwired. Thinking logically takes effort. That is why you have me. Together, we can ensure that your investment decisions are free from emotion, unconscious influences, and in line with your plan.

– Scott

Many investors express discomfort when things are uncertain. This is especially true when experiencing “heightened uncertainty,” such as with the current Eastern European conflict.

However, uncertainty is not just a fact of economic and investment markets, it is a fact of life. Our future, by definition, is uncertain. There are times when the future is perceived as less uncertain (the sun will rise tomorrow), but there are seldom, if ever, guarantees of future outcomes. In other words, life happens in probabilities. Learning to consider probabilities into our decision-making process will help us become more comfortable living with uncertainty.

The Probability Problem

Perhaps the greatest challenge to thinking in probabilities is that it is just not natural. While our brains are filled with gray matter, they hate gray areas. They want to think in terms of certainty and will often convert a probabilistic scenario to either “will happen” or “will not happen.” An 85% chance of rain? The brain defaults to, “it’s certain to rain.”

When it comes to investing, we often hear terms such as “risk on” and “risk off” as if investing is just a switch. Many investors similarly think in terms of “all in” or “all out.” This type of binary decision-making is natural, easy, and reinforced by the media. But it may lead to costly investment decisions.

Investing Probabilistically

Investing probabilistically is about making adjustments to your allocation, rather than making a significant move that amounts to a bet on which way the market will go. When the risk/reward balance is perceived as unfavorable, perhaps a small shift to safer assets is in order. And vice versa when the risk/reward balance is more favorable.

Because we can’t divine the future, the correctness of an investment decision should be based on strategy and probability, not the final outcome. A good practice is stop guessing what the market will do in the future. It can’t be known. Instead, consider making probabilistic adjustments commensurate with your risk tolerance. That will help you become more comfortable investing amid uncertainty.

– Scott

Selling a security is something that investors ponder from time to time. Whether that security is an individual stock, a mutual fund, or an index fund, investors are left with the question of what to do with the proceeds.

No matter the reason for selling, it is important we have a well-thought plan for what we will do with the proceeds…before we pull the trigger.

Remaining in Cash

The default for selling securities is to remain in cash. Whether the markets are high or low, we may justify sitting in cash until the “uncertainty and tough times pass.” This logic relies on a significant (and incorrect) assumption – that there will be an all-clear signal that it is a good time to invest.

Sitting in cash may seem to be a comfortable and safe move, but it is fraught with uncertainties and long-term danger. When do we get back in? What if the market keeps moving higher? At what point do we realize that the train has left the station and we aren’t on board?

Investing in Another Security

We may sell a security with plans to invest in a different one. Sometimes we are influenced to buy a security that has been performing better than what we own. The question we must ask ourselves is: “What evidence do I have that the new security will perform better than the existing one?”

This is an important question to reflect and discuss with me. A lot of money has been lost because investors sold and bought at the wrong time. This happens with both novice and professional investors, including institutional managers.

In a study spanning 24 years, researchers analyzed the trading results of institutional money managers. They found that the stocks they sold subsequently outperformed the stocks they bought at a cost of over $170 billion. The abstract summarized, “Plan sponsors could have saved hundreds of billions of dollars in assets had they simply stayed the course.”1

Thoughtful Selling

Of course, there are occasions when selling a security makes sense. But that should only be after intentional thought and creating a “what’s next” plan. It is so easy to sell, and our emotions can sometimes get the best of us. But that is why I am here. I am here to help you make thoughtful decisions that are in line with your plan.

– Scott

1. Scott Stewart, John Neumann, Christopher Knittel & Jeffrey Heisler, “Absence of Value: An Analysis of Investment Allocation Decisions by Institutional Plan Sponsors”, Financial Analysts Journal 65, no. 6 (2009)

Selling a security is something that investors ponder from time to time. Whether that security is an individual stock, a mutual fund, or an index fund, investors are left with the question of what to do with the proceeds.

No matter the reason for selling, it is important we have a well-thought plan for what we will do with the proceeds…before we pull the trigger.

Remaining in Cash

The default for selling securities is to remain in cash. Whether the markets are high or low, we may justify sitting in cash until the “uncertainty and tough times pass.” This logic relies on a significant (and incorrect) assumption – that there will be an all-clear signal that it is a good time to invest.

Sitting in cash may seem to be a comfortable and safe move, but it is fraught with uncertainties and long-term danger. When do we get back in? What if the market keeps moving higher? At what point do we realize that the train has left the station and we aren’t on board?

Investing in Another Security

We may sell a security with plans to invest in a different one. Sometimes we are influenced to buy a security that has been performing better than what we own. The question we must ask ourselves is: “What evidence do I have that the new security will perform better than the existing one?”

This is an important question to reflect and discuss with me. A lot of money has been lost because investors sold and bought at the wrong time. This happens with both novice and professional investors, including institutional managers.

In a study spanning 24 years, researchers analyzed the trading results of institutional money managers. They found that the stocks they sold subsequently outperformed the stocks they bought at a cost of over $170 billion. The abstract summarized, “Plan sponsors could have saved hundreds of billions of dollars in assets had they simply stayed the course.”¹

Thoughtful Selling

Of course, there are occasions when selling a security makes sense. But that should only be after intentional thought and creating a “what’s next” plan. It is so easy to sell, and our emotions can sometimes get the best of us. But that is why I am here. I am here to help you make thoughtful decisions that are in line with your plan.

– Scott

1. Scott Stewart, John Neumann, Christopher Knittel & Jeffrey Heisler, “Absence of Value: An Analysis of Investment Allocation Decisions by Institutional Plan Sponsors”, Financial Analysts Journal 65, no. 6 (2009)

Every December we get inundated with forecasts for the following year. These forecasts range from expected GDP and interest rates to stock market performance.

We are naturally attracted to forecasts because they purport to tell us what is going to happen, and they often are supported by persuasive reasoning and statistical analysis. After listening to a confident and persuasive forecast, especially if it is one we hope will come to pass, we may be inclined to make changes to our investment strategies in line with that forecast. But herein lies the mental deception. While forecasts appear to reduce future uncertainty, that is only an illusion because the markets are simply unpredictable.

Forecasting Challenges

Over the past 20 years, when polling economists and market strategists as a group to come up with a consensus forecast, not once did they forecast the stock market would be down the following year. Yet, we experienced six negative years. But that is not all. Experts predicted several recessions that never occurred and have been predicting a bubble for the last several years.

When it comes to forecasting the market and economy, it’s not so much about someone’s experience or knowledge. It’s about the predictability of the event. The market is impossible to predict because the future, by definition, is uncertain. Unexpected events (life happens), our responses to world events, and randomness make accurately forecasting the markets an impossible task. The proof is in the fact that no one can do it – consistently.

Using Forecasts Responsibly

Not all forecasts need be ignored. Some are better than others. Forecasts that offer a large range of potential outcomes can be helpful in setting our expectations for the future. Creating a vision of what is possible in the future is much more beneficial for our planning and decision-making than a specific forecast. Remember, the more specific the forecast, the more likely it will be wrong.

I read and review many forecasts that are published. I look forward to sharing with you in the coming weeks my thoughts along with productive expectations and perspectives to help us have a great 2022, no matter what the markets may do.

– Scott

It may seem like a misnomer to discuss the wisdom of being ignorant. Ignorance, defined as a lack of knowledge or information, is not generally viewed as a positive attribute. But it is absolutely essential for our individual success – both financial and psychological.

I am ignorant to how cell phones actually transmit my voice instantaneously across the globe to another person. When I take medicine I know it will make me feel better, but I am ignorant to how the pill interacts with my cells to make it all happen. I am grateful other people know this so I can benefit from their knowledge. If we weren’t ignorant about certain things, we wouldn’t have the capacity to become an expert or specialist in other things.

There is simply too much information for us to process everything. Selective attention and ignorance not only make the economies function, but they make us all need each other. We value each other and are grateful for others’ expertise where we are ignorant, and vice versa.

Selective Investment Ignorance

When it comes to investing, ignorance truly is bliss. The news story of the day, the quote of the hour and the many unreliable predictions do not help investors achieve better results. To the contrary, many studies have shown that investors that pay attention to such fleeting information trade more often and achieve lower returns.¹ In addition, the constantly changing market information produces greater stress and anxiety, which may weigh heavily on our personal lives and relationships.

As we come upon the Thanksgiving season, I am grateful that I have a choice of what I pay attention to and what I ignore. We cannot control the volume, frequency or insanity of information, but we can choose what we allow in our minds.

With investing there is always something to worry about; always has been, always will be. But that is your choice. I have not heard of a single person, on their death bed, that wished they would have watched the market more often. Be wise by exercising ignorance in those things that detract from your happiness focus your time and attention on what really matters.

– Scott

There are many concerns today that can significantly affect our thoughts, actions and quality of life. Fires out west. A devastating hurricane in the south. Afghanistan. COVID. The list could go on and on.

There are many things that are beyond our control in life. However, we can choose to focus on those things we have control over.

This is a great time to create a virtuous cycle to help us remain focused and become our best selves. Creating a virtuous cycle is empowering and enduring. It often results in greater contentment and success in our lives. It is an upward spiral of potential and progress.

A virtuous cycle is a product of our choices. It is not dependent on good luck nor avoiding bad outcomes. The following three tips can help you create your own virtuous cycle:

1. Surround Yourself with Great People

   We tend to take on attributes of those we associate with. These social connections influence how we think, feel and behave. It’s easy to be negative and a cynic; much more difficult these days to be an optimist – that is a gift. Choose to be around positive people and allow their perspectives and disposition to rub off on you.

2. Praise Others

   Be liberal with complimenting others and slow to criticize. In our day this is much easier said than done. Direct praise (you are a great friend) is much better than comparison praise (you are a better friend than Linda). Combine gratitude with praise for the optimal effect (I appreciate how you listen and give me good advice). Direct praise increases another’s self-worth and your individual potential.

3. Avoid Negativity

   We don’t always agree with others. Everyone has virtue and shortcomings. We can choose to focus on positive qualities of others (and ourselves) rather than their flaws.

Circumstances may influence us, but they don’t have to compel us. We can choose to act positively, rather than be acted upon by negative externalities.

– Scott

Time is an interesting dimension. It is a fixed measurement, yet our perception of time varies greatly depending on what we are doing.

It has been said that the longest eight seconds in life is riding a bull. I never rode a bull and have no interest in testing that statement for myself. So, I will take it as fact. But even so, eight seconds is eight seconds – regardless of what we are doing.

It’s About Perception

Time seems to “fly” when we are engaged in a fun, exciting or stimulating activity. And it appears to stand still when we are scared, anxious or bored. In other words, the things we enjoy in life make it “go” quickly, while the things we dislike seem like they last for an eternity.

This means that when we are engaged in desirable activities, such as summer vacation with the family, it may be worthwhile to take a moment to slow down and reflect on the experience. This will allow us to relish the moments and the subsequent memories – which we can call upon during the more difficult times.

Slowing Down & Investing

Slowing down can also help us make better financial decisions. When information comes at us in an orderly rate, we can process the information just fine and draw logical conclusions. But when we get a ton of information all at once, our brain freezes – just like a computer when trying to process many things at once.

When the brain freezes, it can no longer process information and think critically. That part of the brain is offline. If we require a decision right away, the brain will transfer the decision-making to our impulsive brain. That means our decisions will be more influenced by intuition and how we feel rather than thoughtfulness.

One of the things I love most about being an advisor is helping investors decipher what information is worth considering and what isn’t. I’ve found that makes decision making easier, and can greatly improve the overall investment experience.

– Scott

As we are midway through the year, it can be a good idea to take stock of what happened so far, and what we can learn about it. Looking back is an important activity as we seek to progress. It’s not about beating ourselves up for mistakes or feeding our ego for profitable decisions; it’s about learning and improving our thought and decision-making process.

The Fads of 2021

There are two dominant fads this year: “investments” in what are known as meme stocks and cryptocurrencies. Significant movements in both types of assets were driven by headlines and social media posts, not by fundamental changes in the businesses.

Hype is the primary force behind the making of a fad. This is one way to discern the wisdom of an investment. Positive hype often drives prices significantly higher and fuels overconfidence for “investors”. The lack of positive hype can deflate an asset and cause “investors” to dig in even deeper with their speculative convictions. Hype initiates a fad; our emotions keep the fad going.

Buyer Beware

“Investing” in a fad is not real investing, it is speculating. This is because price movement is driven more by what someone says or how a group of people feel than the underlying value or business the asset represents. Such stimuli are highly sensitive and may change radically on a daily basis without any foundation.

Fads can make or lose you a lot of money. A fad can be a fun and exciting way to “invest”. But beware, such excitement may be short lived. And the cost of the powerful, yet temporary, excitement may be significant.

Looking Forward

Expect to see more fads. There will be things that appear to work better than your strategy. There will be talks of “this time is different” and “paradigm shifts” to rationalize opinions and investment decisions.

The ultimate question is whether you want your portfolio to be exciting and hip, or whether you want it to be enduring. I suggest the latter.

– Scott

Portfolio returns and achieving financial goals are a largely a function of two inputs: investor skill and luck. Oftentimes, those inputs get confusing – identifying what is skillful and what is luck/chance.

A basic rule of thumb is that anything you cannot personally control is luck. Investors dedicate a significant amount of time, attention and energy to things beyond their control; in other words, we often confuse luck for skill. We should be focusing more on those things we can control – those things that are actually skillful.

Investment skill is often demonstrated through patience and discipline. These are not easy qualities to develop. The three tips below may make it a bit easier to improve your investment skill.

1. Increase Conviction in Your Strategy

   Many investors make security selections based on a “gut feeling”, expected quick gains or perhaps something they heard or read. If we don’t know why we own something, we are much more likely to be influenced by short-term news, market movements and our emotions. Having conviction in your strategy can provide the strength and courage to remain disciplined during difficult times

2. Know Your Emotional Limits

   Everyone is different. Some people are more susceptible to uncertainty and loss than others. Don’t pretend to be someone you are not; a lot of money is lost because we act like the person we wish we were rather than the person we are. Once you identify your limits, we can tailor an action plan to give you the best probability of achieving your financial goals in the desired time frame

3. Create a “What If” Plan

   The markets never go straight up. Significant pullbacks, recessions and even crashes are inherent features of capital markets. It’s not a question of if, it’s a question of when they will happen. During those times our emotions run high and making a thoughtful decision is very difficult. For that reason, it is helpful to create a “precommitment plan”. A decision plan of what you will do if X happens. That way when things are difficult, it’s not about deciding what to do, it is simply acting on what you have already decided to do

Taking the emotion out of decision making helps us think more clearly and deliberately about our choices and their tradeoffs. Increasing your investment skill isn’t about brute strength. It is about thinking realistically about who we are, what we are going to face and having a plan to get us through the tough times.

– Scott

©2021 The Behavioral Finance Network. Used with permission.