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
Share on linkedin
Share on twitter
Share on google

Where Does the Travel Industry Stand as Summer 2021 Kicks Off?

The travel industry has begun to see growing demand as we move closer to summer. However, not all travel will be the same, as much of the demand is directly related to the COVID-19 vaccine and reduced CDC restrictions. Instead, industry trends have emerged based on individual comfort levels as they apply to different modes of travel.
Below we will explore some of the factors that have contributed to an increase in travel and how different industries are responding to it.

Read More »

Understanding Inflation in 2021: What Investors Need to Know

Following a year of economic instability, it appears that many of us are turning our attention to something that’s been around for decades, but has recently piqued national interest – inflation. In fact, a recent study found that people are Googling the word “inflation” at a rapid rate, with a peak not seen since 2010…

Read More »

Why Women Need to Plan for Long-Term Care

As mothers, sisters and daughters, women are often counted on to be caregivers for family members in need. Whether it’s something as small as a cold or as debilitating as a terminal illness, women are typically the ones to care for and help out when a loved one is sick. But what happens when the caregiver is in need of her own care? Too many women are stuck facing this dilemma head on, instead of preparing for it while there’s still plenty of options, resources and time ahead. Below are a few reasons why it’s so important for women to plan for their own long-term care strategies now.

Read More »