Are you a Solider or a Scout When it Comes to Investing?

It’s no mystery that much of investor behavior (and, consequently, stock market movement) is fueled by emotion and reaction as opposed to hard data or statistics. A recent Ted Talk entitled “Why you think you’re right—even if you’re wrong” sheds some light on the subject of what drives rational thought. Speaker Julia Galef, president and co-founder of the Center for Applied Rationality, describes some of the machinations behind decision-making. You don’t have to look far to find countless studies on the subject of investor behavior and the factors that affect it. Many of the guru strategies we employ are founded […]

New York Times Columnist Says Sit Tight After Brexit

As an investor, it’s not unusual to bristle when the stock market takes a dive then fight the impulse to cut and run. In the wake of Brexit, The New York Times “Your Money” columnist Ron Lieber offers the following words of wisdom: Your portfolio is probably made up of a diverse group of assets, so all of your eggs are not in the stock market basket. If you have been investing in a global stock portfolio in the last seven years, you have most likely made gains. When you invested in stocks, you knew there were risks and whatever […]

A Watched Pot Never Boils — A Lesson in Market Returns

When meeting with clients, Steven Podnos (principal at Florida-based Wealth Care LLC) shared with the Wall Street Journal how he explains the negative impact of emotional decision-making on an investment portfolio. “Over a short period of time,” says Podnos, “you’re almost as likely to have an up market as you are to have a down market. If you can wait five years, then about 90% of the time you’re up in every five-year period. You’re going to be pretty happy.” Podnos shows clients the following chart to illustrate how buying and holding can eventually pay off: While he knows that […]

The “Hurry Up And Kiss Me” Market

The following is an excerpt from the June 3rd, 2016 Validea Hot List newsletter.  Summary:  The financial crisis and Great Recession were incredibly painful events for investors, the financial equivalent of going in for a good night kiss and having your date slap you in the face Because of that, many investors have spent the last several years sitting on the sidelines, not wanting to get hurt again. Seven years of rising stocks and a steadily improving economy haven’t been enough to make them field safe enough dive back into the market. In this week’s newsletter, we talk about how […]

Emotions and Biases Play Huge Role in Bad Investment Decisions

In a recent New York Times article, columnist Gary Belsky observes that “the majority of cognitive biases and shortcuts that influence everyday judgement and choice have analogues in investment behavior.” In other words, insights from behavioral economics and finance explain why people don’t often behave rationally when investing. For example, amateur investors believe they can outperform the professionals, largely because of cognitive biases. The article highlights several, such as overconfidence and optimism biases, as described below. Overconfidence bias is the tendency to overrate one’s abilities, knowledge, and skill. Mirtha Kastrapeli of State Street described overconfidence found in a 2014 study: […]