The political divisiveness that has percolated since the 2016 election continues to suggest that our ability to view issues from other perspectives is challenged. And that’s a problem not just for our politics, but for our financial lives as well. The allure of a narrow, one-sided perspective is in the simplicity and focus of its message. But that doesn’t make it accurate. As financial advisors, we spend a lot of time reading and thinking about cognitive bias, in other words, how our “hunting stories” may overstate our upside at the expense of the outsider’s objective interpretation.
Buying companies you know or whose products you use offers a persuasive sense of comfort to help combat the risk-taking involved in buying stocks. The strategy has even been touted by notoriously successful professional investors like Warren Buffett and Peter Lynch. Undoubtedly, many investors – including some of you reading this – have even made handsome profits buying the likes of Apple, Amazon, Google or Tesla in recent years. So is there something to this strategy? And if not, why does it seem to work?
As I write this, the US stock markets are kicking off 2017 by reaching for record, all-time highs. So why doesn’t it feel like everyone is exuberant?
Why is the idea of change so powerful? Conventional wisdom would suggest that it offers a more pleasant alternative to a relatively unpleasant reality. But I would argue that it need not be so unequivocal. Change offers the illusion of control over situations which may be complex, opaque and alienating.
I just returned from an amazing ski trip in France. My father-in-law has wanted to ski the Alps for the better part of four decades, and this year we made it happen. It was great to enjoy time with family and to meet fellow skiers from around the world. But I was struck by an encounter with a group who had “won” the eight day ski trip for free by signing up investment clients. This wasn’t their first such trip, either, as they had been highly successful in “bringing in assets.”
We are only one month into the New Year, but one in three of us who made New Year’s resolutions have likely already abandoned them. Which left me wondering: why are we so fast to give up on what we want? And with 34% of us making money related resolutions, can we really afford to call it quits? Certainly the market gyrations we’ve seen since last summer have played into my thought process. Very few people are likely to find reviewing their January brokerage statements to be a goal affirming process.
Prioritizing your goals is an important part of financial planning, but it often poses a tricky balance. And it turns out, we may not be wired to negotiate this balance particularly well. The Wall Street Journal recently highlighted a study out of the University of Chicago that showed that people were willing to borrow money at expensive rates to keep savings goals intact. Why?
Do you remember the endless summers of childhood? When your parents dragged you and your annoying siblings on those car trips that seemed to take forever (but were really more like two hours)?
My office window overlooks the local high school’s football stadium. Last Friday, I was wrapping up emails and heard the familiar sound of the school’s marching band warming up for the first Friday night football game. I can’t believe summer is over and school is back in session. It feels like only last week that I was listening to that same stadium blast “Pomp and Circumstance.” For many years now, endless summer seems to only apply to the interminable heat of the Valley.
My experience has been that people naturally gravitate toward two camps when it comes to getting invested. The people in the first camp are rightfully focused on their careers and their families. They diligently sock money away, consciously spending less than they make, until one day they look at their bank statement and think, “Wow! That’s a lot of cash just sitting around!” The hurdle now facing these individuals is inertia—after all, if you haven’t done something about the money for months, what’s a few more days … or weeks … or months? Also, by this point you are typically talking about a large sum of money. And that can be intimidating in decision-making.
While it may not be our favorite topic, all of us have been taken advantage of at some point in our lives. The recent FBI crackdown on a $100 million-plus ATM Ponzi scheme perpetrated in our own backyard hit close to home for many of our clients and has been a frequent topic at recent client meetings.