- Behavioral science shows that people are inherently bad investors and tend to make hasty decisions based on their emotions.
- Emotions and biases aren’t necessarily bad when it comes to investing, says certified financial planner Tim Maurer, but they should be kept in perspective.
- “People need to deal with their emotions proactively rather than making immediate decisions during difficult times,” Maurer said.
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Emotions can take over when it comes to investing, especially when financial markets are volatile.
Behavioral finance shows us that we are inherently bad investors and tend to make decisions based on emotion rather than evidence and self-interest. Just as we are a bundle of prejudices and fears in our personal lives, we are the same in our investment lives. We are afraid of loss, we are afraid of missing out on gains. We are biased towards consensus opinion and recent experience.
“People are always emotional,” he said Tim Maurer Top adviser Signature FDwith offices in Atlanta and Charlotte, North Carolina.
“You might think we’re making rational decisions, but usually we’re not,” said Maurer, a certified financial planner who is also a member of the CNBC Financial Advisors Council. They’re likely emotionally driven, and we rationalize that.”
But Maurer doesn’t dismiss the investor’s emotional reaction outright as something that should be suppressed.
“These are imperfect emotions and the idea that we are responding inappropriately is false,” he said. “These emotions and fears exist and are not necessarily bad or good. It should be recognized that it is neutral and not
However, they should be controlled. Emotions are not a sound foundation for any investment strategy. Evidence continues to show that active investors underperform the market over the long term.
By the time most people react to market events, the market has already priced in the risk. Timing rises and falls in financial asset prices is rarely profitable for investors.
But what if you’re worried about the banking crisis? Or is there still the possibility of a hawkish Federal Reserve and a recession on the horizon?
Like all good advisors, Maurer recommends holding tight. Investors will do well in the long run if they follow a well-thought-out plan that balances their short- and long-term financial needs and risk tolerance.
“The whole concept of a balanced portfolio is designed to accommodate our emotions and fears,” Maurer said. “Otherwise, you should always invest in small-value stocks that outperform all others over the long term.
“Bond investment [emotional] “We own them so we can continue to invest in stocks during tough times.”
According to the Merriam-Webster Dictionary, prejudices are temperamental or outlook tendencies, personal and sometimes irrational judgments. It is generally considered a negative trait and ideally one that should be overcome. However, in the context of investing, bias is not necessarily a bad thing.
“There are reasons for our prejudices,” says Maurer. “It’s not unnatural to think about changing your investment strategy when you feel the market is at its peak.”
“It may not be optimal, but it’s not unnatural.”
I advocate aggressively managing asset allocation when someone’s risk tolerance truly changes, but not when I think bank stocks are overvalued.
Tim Maurer
Chief Advisory Officer, Signature FD
Some behavioral biases protect us.
Most Americans have a bias between the current dollar and the future dollar, but the opposite can also be bad.
“There are people who are funding the future but not the present in the form of emergency cash,” Maurer said. You’re forced to spend your money at the wrong time.”
“In other words, our prejudice against the present makes sense on that point,” he said.
Taking care of the present is especially important for retirees or those approaching retirement.
“People sleep better at night knowing they have enough cash to sustain them for seven to 12 years,” he said. “They are likely to do a better job of looking at stock market volatility and investing for the future.
Maurer has been a financial advisor for 25 years. He believes in a diversified investment portfolio and sticks to financial planning. However, if market volatility is a source of great anxiety for someone, he is not against changing the portfolio.
“If someone’s risk tolerance really changes, I advocate aggressively managing their asset allocation, but not if they think bank stocks are overvalued,” he said. said. “If someone risks giving up his 60/40 [stock/bond] Without an all-cash allocation, they might find solace in taking some action that isn’t that extreme. ”
We are emotional beings by nature, and few things elicit more emotions than when we consider our investments to be at risk. Acknowledge these feelings. don’t deny them. Maurer says it will give them more control and make better financial decisions.
Face those fears sooner or later.
“I am biased toward positivity, not reactivity,” he said. “People need to adapt to their emotions in advance rather than making immediate decisions during difficult times.”
