Atlanta Financial Blog

Are Emotions Ruling Your Portfolio?

Are Emotions Ruling Your Portfolio?

Harrison Fant, CFP®, AIF®
March 26, 2019

As human beings we may not be wired to make good financial decisions. Behavioral finance points to anchoring bias and recency bias are just two of the many factors that influence our decision-making. If not properly addressed, these biases can have a negative impact on the foundation and long-term success of your financial plan, and they tend to present themselves most strongly at the tail-end of a bull market.

Anchoring bias is the tendency to use first impressions to form perceptions, which then tend to affect our later decisions. A common example of this anchoring effect for investors is that if you buy a stock for $100 and it later drops to $80, you are predisposed to still internally value it at $100. Investors tend to anchor the fair value of their positions to the original price they paid rather than what the market tells them the investment is worth. This can result in holding losing positions for far too long in hopes that they will return to their original price, even if they never do.

The other side of this anchoring bias in investing is a disposition effect. In this case, investors are still anchored to the initial purchase price of an investment and therefore feel more comfortable selling when they can realize gains, even if selling is not advisable at that time. When anchoring and disposition biases come together, it is easy to wind up with a portfolio full of poor investments, as we’ve felt inclined to sell our winners and hold onto our losers.

Recency bias is the belief that whatever happened in the recent past is going to happen in the future. This thought process is particularly dangerous in the last few years of a bull market, as many investors believe that the sky is the limit and markets are bound to continue moving upward. We are now in the longest bull market in US history, and it is not a coincidence that many investors are flocking to index funds in hopes of matching the return of the S&P 500, Dow, Nasdaq or whatever other index they feel is going to lead the charge.

Because the recent focus has been on how well these indices have performed over the last few years, many people tend to discount or completely forget about the negative volatility associated with these passive strategies. A critical detail that is often overlooked by individual investors is how their favorite index has performed over a full market cycle – from peak to peak or trough to trough. By taking a longer-term perspective you can not only be more prepared for the inevitable ups and downs of the markets, but can also cut out some of the excessive volatility from an overly-concentrated portfolio.

The question remains: How do you overcome behavioral biases that can negatively impact your portfolio and planning? The short answer is research, and a lot of it. Even with the most disciplined research approach though, it is also important to work with an objective financial professional who can help eliminate emotional decision making. These biases are just one reason why Atlanta Financial has such a uniquely robust and disciplined investment research process. All of us are wired to make decisions based on our emotions, which is why we at Atlanta Financial believe one of our main responsibilities as financial advisors is to help guide our clients to think more rationally and objectively about investing.

Share This:

Share on facebook
Facebook
Share on linkedin
LinkedIn
Share on twitter
Twitter
Share on google
Google+

CAN Money Buy Happiness?

For most of our lives many of us have heard the old adage “Money can’t buy happiness.” And we can all think of numerous examples of individuals where this certainly seems to be true – whether among the powerful and famous, or within our own family or group of friends. But is that really true? Research over the last few decades suggests “NO!” In fact, many studies show that in one sense money can buy happiness. But it’s not the amount of money we have, but rather how we SPEND our money that can indeed increase our happiness – although perhaps not in the way Madison Avenue or Amazon Prime would like us to think. First, let’s address the skeptics among you who feel sure that if you simply had MORE money you would indeed be happier. Statistics show that certainly isn’t true, since 70% of all lottery winners or those with a sudden financial windfall end up bankrupt within a few years.1 Carl Jung, famous psychologist, said in fact that the keys to happiness were five things.

Read More »

The New Tax Bill: Tallying the Results

“How did the new tax bill affect me?” was the question on everyone’s minds this tax season, and for good reason. Even though this was touted as the greatest simplification of the tax code in my lifetime, I didn’t notice any reduction in time spent preparing returns. Those of you who reviewed your returns in detail noticed that the schedules look drastically different although contain all the same information. The short answer for many is that it didn’t materially change your overall tax liability. The outliers fell into one of a few buckets…

Read More »

How to Choose the Best Trustee for your Estate

No one enjoys thinking about what will happen after they’re gone, but we all want our families to be well cared for. Many people set up trusts to provide for their loved ones, but the trust is only as good as its trustee.Choosing a trustee is one of the more difficult decisions in creating your estate plan. Some attorneys suggest choosing several trustees to promote checks and balances, but sometimes choosing just one trustee can be difficult in light of family relationships and other factors. Choosing a trustee is a very personal and complex decision, but there are some basic guidelines one should consider.

Read More »

“Honey, I shrunk the tuition … burden”

It is that time of year again where school years are coming to a close and many parents are gearing up for a bitter-sweet high school graduation or are celebrating their child being one year closer to a hard-earned college diploma. Whatever the case may be, it is hard to deny the heavy lift education costs can be. You may not be able to shrink the bottom-line cost of attendance any further, and you surely can’t impact how fast many costs are going up, but, you can reduce the weight this line-item carries within your financial plan by remembering these 5 things:

Read More »