Behavioral Finance: Intro
In the midst of the current market turbulence, many of our clients are paying more attention to financial markets and their investment portfolios than they otherwise typically might. Rather than allowing headlines to influence our emotions, at PDS Planning we rely upon longer-term data and historical context to put the current environment into perspective and allow us to make more informed decisions.
In light of clients’ rekindled interest and heightened awareness, we thought it would be helpful to review some investing basics through the lens of our time-tested belief that “today’s headlines and tomorrow’s reality are seldom the same.” By sharing our objective outlook, we hope to alleviate some of our clients’ short-term emotional anxiety while achieving better long-term financial results for them.
What is “Behavioral Finance”
In theory, financial markets are efficient. All necessary information is available to the public and logical decisions can be made by rational, unemotional investors. However, theory and reality are often quite different, and investing is no exception.
The study of investor behavior is called Behavioral Finance and argues that people are not nearly as rational when making investment decisions as traditional finance theory suggests. In other words, psychological influences and biases affect the financial decisions of investors and investment professionals, causing them, at times, to make irrational decisions. The most basic, fundamental rules of investing are “buy low, sell high” and “past performance may not be indicative of future results”. But for the average investor, their actual investment returns tend to underperform the markets.
Recognizing Behavioral Finance Biases
To better invest for the future, an understanding of the different behavioral biases is the first step to overcoming them. In forthcoming blog posts, we will explore numerous key behavioral finance biases including:
- Loss Aversion
- Overconfidence
- Herding
- Familiarity (aka. “Home Country Bias”)
- Mental Accounting
The Value of a Professional Advisor
One of the primary benefits of working with a professional advisor such as PDS Planning is our ability to provide discipline and guidance. According to research by Vanguard, “Behavioral coaching may add 1% to 2% in net return”. As they explain, “Having emotions isn’t a “rational or irrational investor issue; it’s a human issue.” While most investors have the best intentions when making financial decisions, in the heat of the moment when emotions are elevated, they may have a hard time sticking to their plan.
Since 1985, PDS Planning has worked with clients to eliminate the stress often associated with planning your financial future. With over 30 years of experience helping clients plan their investments, we’re experts at optimizing an investment plan to each individual’s highly specific needs. We’ll work to understand your vision for the short and long-term. And we will provide objective guidance on the proper path to help reach your goals.
To learn more about PDS Planning, please contact us.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only. Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy. It is provided with the understanding that no fiduciary relationship exists because of this report. Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice. PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice. If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives. All rights reserved.