Dear Clients & Friends,
This year has disrupted many of our routines. We have been forced to rethink old habits and adopt new ones. I read that it takes 66 days on average to form a new habit and a minimum of 21 days. The pandemic has lasted long enough to significantly change habits and routines.
What this means for the future is still an open question. As the evolving environment creates new habits, norms, challenges, and opportunities, the need for effective problem-solving increases. The good news is that we’ve had a lot of practice so far.
Investor Psychology: Are you Under the Influence of Behavioral Bias?
The field of behavioral finance focuses on the emotional and cognitive aspects of investing. In recent decades, well-known economists have advanced the theory that investors' decisions can be driven by human emotions such as greed and fear, which helps explain why asset prices sometimes fluctuate erratically.1 It can be difficult to act rationally when your financial future is at stake, especially when unexpected events upset the markets. Understanding certain aspects of human nature, and your own vulnerabilities, might help you stay levelheaded in the heat of the moment. Here are six behavioral biases, which could also be called mental shortcuts or blind spots, that might lead you to make less favorable portfolio decisions.
1. Herd mentality. Many people can be convinced by their peers to follow trends, even if it's not in their own best interests. When investors chase returns and follow the herd into "hot" investments, it can drive up prices to unsustainable levels and create asset bubbles that eventually burst. Joining the crowd and fleeing the stock market after it falls, and/or waiting too long (until prices have already risen) to reinvest, could harm your long-term portfolio returns.
2. Availability bias. People tend to base their judgments on information that immediately comes to mind. This could cause you to miscalculate risks or expected returns. In the same way that watching a movie about sharks can make it seem more dangerous to swim in the ocean, a recent news article can shape how you perceive the quality of an investment opportunity.
3. Confirmation bias. People also have a tendency to search out and remember information that confirms, rather than challenges, their current beliefs. If you have a good feeling about a certain investment, you may be more likely to ignore critical facts and focus on data that supports your opinion.
4. Overconfidence. Some individuals overestimate their skills, knowledge, and ability to predict probable outcomes. When it comes to investing, overconfidence may cause you to trade excessively and/or downplay potential risks.
5. Loss aversion. Many investors dislike losses much more than they enjoy gains. Because it actually feels bad to experience a financial loss, you might avoid selling an investment that would realize a loss, even though it might be an appropriate course of action. An intense fear of losing money may even be paralyzing. Retirees and higher-net-worth investors were more likely than other groups to experience these market moods. The following chart on the right illustrates the percentage of U.S. investors who say the performance of their investments affects their daily mood (a little or a lot).
6. Anchoring effect. When making decisions, people often depend heavily on the first information they receive, then adjust from that starting point based on new data. For investors, this translates into placing too much emphasis on an initial value (or purchase price) or on recent market performance. Investors who were "anchored" to the financial crisis may still be fearful of the stock market, even after years of strong returns. Another investor who has only experienced years of gains might be inclined to take on too much risk.
Every investment decision should take your financial goals, time horizon, and risk tolerance into account. Having a long-term perspective and a thoughtfully crafted investing strategy may help you avoid expensive, emotion-driven mistakes. Please see the attached financial planning checking list to identify areas where you may need more financial support or to discover additional opportunities to help you achieve your financial goals.
1) "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, Winter 2003
Photo: Gallup, 2019
What’s New with Our Team
Over the past month or so, we participated in the Portland Regional Chamber of Commerce’s 21 Day Racial Equity Challenge. Developed by Dr. Eddie Moore, Jr. and Debby Irving, this challenge has been adapted by organizations across the country. The challenge was designed to create dedicated time and space for each of us to build more effective social justice habits, particularly those dealing with issues of race, power, privilege and leadership. Each day we made a commitment to reading an article, listening to a podcast, watching a video, etc. Though 21 days does not even begin to cover the bases for what we need to understand, it has helped us each make a habit of doing something every day to broaden our own perspectives.
Though the challenge has ended the Chamber has posted each day’s learnings on their website, if you are interesting in learning more.
In other news, Dan was able to take advantage of one of the warmest summer’s Maine has seen and was able to go on a few sailing trips with a few of his friends in Mid-Coast Maine.
Nellie hiked all 14 of Maine’s 4000+ foot mountains this season, ending with 5,269 ft Mount Katahdin, Maine’s tallest mountain.
Kelsey participated in and raised money for Jibe Cycling Studio’s 12-hour Spin-A-Thon at the Cross Insurance Arena to raise funds for the Maine Cancer Foundation. The event raised close to $15,000.
MARKET COMMENTARY
Janney's analysts discuss the global pandemic's impact on the economy.
In this podcast, Market Strategist Gregory Drahuschak speaks with Guy LeBas, Chief Fixed Income Strategist, and Mark Luschini, Chief Investment Strategist, to discuss the cause of recent bond buying from overseas as well as the potential impact recent stimulus discussions and new coronavirus cases could have on the economic recovery.
Topics covered include:
- How foreign buyers view the U.S. bond markets
- Relationship between hedging costs and U.S. yields
- Recent equity market strength and stimulus discussions back on table
- New coronavirus cases and potential impact on economic recovery
Click here to listen to our most recent content from our investment strategy group.
Thank you for your business!
Good service is always worth sharing. We’re proud we have earned your confidence and trust, and we want to thank you for allowing us to work with you. If you have friends or family who would benefit from our knowledge and experience, I hope you will allow us to contact them. If there is anything we can do to be of additional value and service to you please do not hesitate to reach out.
The Honan Group of Janney Montgomery Scott LLC
50 Portland Pier, Suite 200 Portland, ME 04101
dhonan@janney.com 207-536-2162
nhonan@janney.com 207-536-2163
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