The biggest investing risks are born of human decision-making, according to a recent CFA Institute article that outlines behavioral biases and how to combat them. “Biology encourages our brains to take cognitive shortcut that can cause big problems,” the article states, but adds that there are workarounds to these tendencies. It cites comments from psychologist Daniel Crosby, who believes that identifying these biases is the first step to overcoming them. Crosby condenses what academics have… Read More
The AAII Journal recently reported on a survey it conducted to evaluate what lasting impact the 2007-2009 financial crisis has had on its members’ investing decisions. Here are highlights of the results from 227 member respondents: 46% indicated that they changed their investment strategy or portfolio allocation; 22% described themselves as having become more cautious, patient or adoptive of a more conservative approach; More than 8% said they pay more attention to the market; Nearly… Read More
In a recent article for The Wall Street Journal, columnist Jason Zweig writes, “Bit by bit, the myth of the ‘dumb money’ is dying.” Although Wall Street has long characterized individual investors as being “ill-informed, fickle and hapless” and therefore in need of fee-based advice, Zweig argues that the claim is “nonsense” and that “new evidence of its foolishness is piling up fast.” He cites a recent study of Vanguard Group clients that shows them… Read More
By Jack Forehand (@practicalquant) There are so many biases that can hurt your returns in investing that it is hard to keep track of them. There is also no shortage of advice being given on how to recognize these biases and combat them. This advice would lead you to believe that if you just did certain things, you could escape their impact and prevent them from hurting you. There is one major problem with this… Read More
An article in CFA Institute highlights a “disappointing” statistic from a Gallup survey: “31% of investors would prefer to sit in gridlock than rebalance their portfolios,” and argues that “systematic rebalancing is one of the few opportunities for a nearly ‘free lunch’ that the markets offer.” The article notes that year-end 2018 was a good time to rebalance, that the market’s decline “gave investors an opportunity to buy at lower prices, which should lead to… Read More
In an article for last month’s ETF.com, BAM Alliance director of research Larry Swedroe offered some insight on how to weather potential market volatility using a balanced view of the current environment. “While the economic expansion is now 10 years old, expansions don’t die of old age,” writes Swedroe. “They die either because geopolitical risks show up or because the Fed tightens monetary policy, driving real rates to high levels to fight inflation.” Swedroe argues… Read More
Below are links to our most popular posts for this week on Validea’s Guru Investor blog.- [1] Five Questions: Behavior in Investing with Dr. Daniel Crosby [2] Mauboussin on the Pitfalls of Using EV/EBITDA in Valuations [3] Hulbert: Fund Performance is Largely Luck-Driven [4] Pure-Factor ETFs Poised to Shine in Market Downturn ——- Photo: Copyright: arcady31 / 123RF Stock Photo
By Justin J. Carbonneau (@jjcarbonneau) — The original “hierarchy of needs” model was developed by Abraham Maslow in 1943. Maslow proposed the hierarchy as a way to understand human motivation and later extended it to human curiosity. The hierarchy can be viewed as a pyramid with layers, which included things like “physiological,” “safety,” “belonging and love,” “esteem,” and “self-actualization”. Each part builds off the one below, and before one could move up the pyramid the… Read More
By Jack Forehand (@practicalquant) — Because it’s easier, we’re inclined to use our recent experience as the baseline for what will happen in the future. In many situations, this bias works just fine, but when it comes to investing and money it can cause problems. -Carl Richards The next market crash must be coming. We are already in our second correction of the year and having lived through the past two bear markets, it seems obvious that… Read More
New evidence suggests that investors may be shifting their habit of buying high and selling low, according to a recent article in The Wall Street Journal. The article reports that a Morningstar study published in June found that the average mutual fund gained 5.79% annually over the 10 years ended March 31st while the average investor gained 5.53%–the 0.26 difference representing a much narrower gap than in the past. Over the decade ending 2013, for example,… Read More