Our team got together to take a look back at the market in 2023 while looking ahead to 2024 and what investors might be able to expect.
Author: Zack Klien
Conrad Siegel’s Tracy Burke, CFP®, ChFC® and Catherine Azeles, CFP®, RICP® share an overview of the investment world. Together, they take a look at what the market did during the last quarter, what we can expect moving forward, and what this all means for you.
Conrad Siegel’s Tracy Burke, CFP®, ChFC® and Catherine Azeles, CFP®, RICP® share an overview of the investment world. Together, they take a look at what the market did during the last quarter, what we can expect moving forward, and what this all means for you.
For decades behavioral finance was largely an academic pursuit, more recently this body of knowledge has been recognized for its impact on investing. Daniel Kahneman and Richard Thaler have been awarded Nobel Prizes for their contribution to this field of research. What follows is behavioral finance in plain English. Knowing these mental blind spots might make you a better investor.
Legendary economist and investor Benjamin Graham said it best “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
Your own behavioral biases are often the greatest threat to your financial well-being. As investors, we leap before we look. We stay when we should go. We cringe at the very risks that are expected to generate our greatest rewards.
Most of the behavioral biases that influence your investment decisions come from mental shortcuts we depend on to think more efficiently and act more effectively in our busy lives. Usually these short-cuts work well for us. They can be powerful allies when we encounter physical threats, or even when we’re simply trying to stay afloat in the sea of decisions we face every day. These same survival-driven instincts that are otherwise so helpful can turn problematic in investing.
Let’s take a look at these concepts…
Anchoring: Going Down With the Ship. Fixing on earlier references that don’t serve your best interests.
Real life scenario: I paid $11/share for this stock and now it’s only worth $9. I won’t sell it until I’ve broken even.
Confirmation: The “I Thought So” Bias. Seeking news that supports your beliefs and ignoring conflicting evidence.
Real life scenario: After forming initial reactions, we’ll ignore new facts and find false affirmations to justify our chosen course … even if it would be in our best financial interest to consider a change.
Familiarity Breeds Complacency. “Familiar” doesn’t always mean “safer” or “better.”
Real life scenario: By over concentrating in familiar assets, you decrease global diversification and increase your exposure to unnecessary market risks. This is very common when employees own a large stake in their employer’s stock.
Fear: “Get Me Out NOW!”. The panic we feel whenever the markets encounter a rough patch.
Real life scenario: While you may be well-served to run from a dangerous physical situation, doing the same with your investments might lock you into a loss without participating in the recovery.
Greed: Excitement Is an Investor’s Enemy. Fear of missing out, Chasing hot stocks, sectors, or markets, hoping to score larger-than-life returns.
Real life scenario: When you speculate, you can get burned in high-flying markets. Remember to focus on what really counts: managing risks, controlling costs, and sticking to the plan.
Loss Aversion: Avoiding Pain Is Even Better Than a Gain. We are hardwired to despise losing even more than we crave winning.
Real life scenario: We attempt to time the market by selling before it drops. Ultimately, market-timing is more likely to increase costs and decrease expected returns.
Overconfidence: Better Than Average? Everyone believes they’re above average. Clearly, not everyone can be correct.
Real life scenario: Overconfidence makes you believe you’ve got the rare luck or skill required to consistently “beat” the market, instead of patiently participating in its long-term returns. Slow and steady wins the race.
Sunk Cost: Throwing Good Money After Bad. It’s more painful to lose something if you’ve already invested time, energy, or money into it.
Real life scenario: The past is past. Don’t let sunk cost fallacy stop you from unloading an existing holding once it no longer belongs in your portfolio.
Don’t go it alone – your brain has a difficult time “seeing” its own biases. Having an objective advisor dedicated to serving your highest financial interests is among your strongest defense against all of these mental traps.
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Harrisburg, PA – July 10, 2023 – Conrad Siegel, delivering comprehensive employee benefits and investment advisory services, recently announced that Catherine Azeles, CFP®, RICP®, CDFA® has been appointed a partner at the firm.
Azeles, an investment consultant, works within the firm’s Wealth Management division – the organization’s fastest growing line of business. She has worked at Conrad Siegel since 2018 and has played a key role in the firm’s growth during that time.
Azeles specializes in comprehensive financial planning, investment management, and retirement planning for local families. She has quickly grown her client base and will now move into a leadership position that not only focuses on serving clients but also shaping the future vision of the firm.
“We are very proud to welcome Catherine as a partner,” said Tracy Burke, Partner and Investment Consultant at Conrad Siegel. “From a technical perspective, Catherine is as good as it gets. She brings a tremendous amount of investment and financial expertise to our team. What really sets her apart is her care and compassion. It shines through in everything Catherine does. She cares about our clients, our team, and our community which perfectly aligns with our firm’s mission – making her the perfect fit to join our leadership.
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It’s understandable if the economic uncertainty unfolding in the daily news has left you wondering – or worrying – about what’s coming next. Regardless of how the coming weeks and months unfold, are you okay with gritting your teeth, and keeping your carefully structured portfolio on track as planned? This probably doesn’t surprise you, but that’s exactly what we would suggest. (Unless, of course, new or different personal circumstances warrant revisiting your investments for reasons that have nothing to do with the current market environment.)
That said, the financial and economic news is uncertain. If you’ve got your doubts, you may be wondering whether you should somehow shift your portfolio to higher ground, until the coast seems clear. In other words, might these stressful times justify a measure of market-timing?
Here are four important reminders on the perils of trying to time the market – at any time. It may offer some emotional relief, but market-timing ultimately runs counter to your best strategies for building durable, long-term wealth.
- Market-Timing Is Undependable. Granted, it’s almost certainly only a matter of time before we experience another recession. As such, it may periodically feel “obvious” that the next one is nearly here. But is it? It’s possible, but market history has shown us time and again that seemingly sure bets often end up being losing ones instead. When markets drop swiftly, many investors wonder whether to expect nothing but trouble in the future. More often than not, market downturns end up being a brief stumble rather than a lasting fall. Had you gotten out following the downturn, you might still be sitting on the sidelines, wondering when to get back in.
- Market-Timing Odds Are Against You. Market-timing is not only a stressful strategy, it’s more likely to hurt than help your long-term returns. That’s in part because “average” returns aren’t the near-term norm; volatility is. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst. If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns.
- Market-Timing Is Expensive. Whether or not a market-timing gambit plays out in your favor, trading costs real money. To add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially harmful.
- Market-Timing Is Guided by Instinct Over Evidence. As we’ve covered before, your brain excels at responding instantly – instinctively – to real or perceived threats. When market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to take immediate fight-or-flight action. If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your behavioral biases cause your emotions to run ahead of your rational resolve.
We’d like to think one of the most important reasons you hired us as your investment consultant is to help you avoid just these sorts of market-timing perils.
So, if you have your doubts, please let us know. It’s our job and fiduciary duty to offer you our best advice across all of the market’s moves. While market-timing may be illusory, we are here for you, ready to explore various real steps you can take to shore up your investment resolve, regardless of what lies ahead.
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