Contact

News & Insights

Financial Advice the Best Insurance Against Emotional Investing

The Data

Financial evaluation and auditing specialist Dalbar has published several iterations of a study called “Quantitative Analysis of Investor Behavior”*. The 2001 version of the study was the first to establish the concept that the average investor does not achieve market-index returns: during a 17-year period ending in December 2000, the S&P 500 returned an average of 16.29% per year; in contrast, the average equity investor managed only 5.32%. The 2015 iteration of the same study reached a similar finding: “the average equity mutual fund investor underperformed the S&P 500 by a margin of 8.19%”.**

Investing – No Place for Emotion

At the client-face, wealth managers and financial advisors should have access to emotional empathy and be able to understand their clients’ fears and uncertainty, but unlike individual investors, they are trained to be emotionally unaffected by attachment to a particular bad investment or to fear taking an unconventional route. This means they provide discipline and pragmatism to, hopefully, prevent a client’s wavering from the investment strategy that has been put in place.

Lay investing – A Gambler’s Game?

When habitual gamblers find themselves on a losing streak they may embark upon risky behaviours, for instance, they might double up their bets in an attempt to regain losses. Similarly, lay investors may choose to hold on to an ill-fated stock, either as a result of pride or fear of selling at a loss or even because they hold out a blind hope that the price will bounce back.

Prospect Theory*** was developed by Daniel Kahneman and Amos Tversky to explain why people make decisions based on the potential for loss and gain. The theory holds that these losses and gains are evaluated using a set of judgment calls it has been used to explain why so many investors remain wedded to losing stocks.

However, being aware of unhelpful investor behaviour is no guarantee against failing prey to it; far better for an investor to have the cold eye of a professional to guide them, to help prevent them from over or under-reacting, to keep them disciplined and to prevent them from emotionally holding on to a stock that, to the impartial eye, is unlikely to ever be more than a sure-fire loser.

Making your money work for you

Blacktower (US) LLC helps clients establish informed wealth management and retirement planning strategies so that they can have confidence in being able to enjoy a financially secure retirement.

Furthermore, as we specialise in the many cross-border financial issues facing non-resident aliens in the United States as well as other cross-border individuals, we can help you if have financial interests outside of the United States.

For more information about how we may be able to help you, including wealth management, retirement planning, and management of cross-border pensions, contact us today.

* https://www.dalbar.com/QAIB/Index accessed 22-08-19

** https://www.investopedia.com/articles/05/032905.asp accessed 22-08-19

*** https://www.uzh.ch/cmsssl/suz/dam/jcr:00000000-64a0-5b1c-0000-00003b7ec704/10.05-kahneman-tversky-79.pdf accessed 22-08-19

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

Other News

NEWS WRAP – Study Suggests 401(k) System Woefully Inadequate for Most

All being well, when an individual reaches retirement they will have enough cashflow to continue their pre-retirement lifestyle; however, a new study indicates that many in the US will be unable to meet even their basic spending needs once they stop working.

The new report, from the Economic Policy Institute (EPI), finds that despite accruing around three decades worth of savings into their 401(k) accounts, most retirement savers between the ages of 56 and 61 have a median account balance of $21,000.*

It would be tempting to think that younger people were better prepared, yet the same study reveals that the first generation of millennials are just as poorly, if not more poorly, prepared for retirement, with a median 401(k) saving of approximately $1,000.*

Read More

US interest in moving to Europe increases by 40%

Sotheby’s International Realty has reported that the number of Americans registering requests to move from the States to Greece in the last month has increased by 40%  compared to the same period last year. Their latest report has also revealed that their revenue from US expats in Italy has increased from 5% to 12% in […]

Read More

Select your country

Please select your country of residence so we can provide you with the most relevant information: