by Joseph Mathews
For those of us who like to research things, we know flying is one of the safest modes of transportation; exponentially safer than travel by car. So why do we experience anxiety when we fly? It more than likely comes down to one thing, we don”™t have control.
We as humans tend to believe our having control over things ”” or the perception of control ”” ultimately leads to better outcomes. This is a conclusion at which we often arrive without regard for our skills and experience or the process we used to make a decision.
When was the last time you heard someone say they are a worse than average driver?
This phenomenon is known as overconfidence bias in the study of behavioral finance. Unfortunately, it often leads to decision-making that is detrimental to our long-term success as investors.
The “Quantitative Analysis of Investor Behavior,” an annual study conducted by Dalbar, shows the performance of individuals year in and year out significantly lags the performance of the investments they make. How is this possible? It comes down to poor decision-making with respect to when and how investments are allocated.
It can be difficult to do well when you are buying more of an investment after it”™s gone up a lot or selling a good long-term investment after it”™s gone through a rough patch. It”™s akin to driving your car while you are looking out your rear view mirror. In investment terms, this is known as hindsight bias.
As we enter into the latter stages of our bull market here in the United States, many investors are still in a state of disbelief. Money flow continues to move toward low-risk/low-return investments and away from higher returning investments, like stocks, in spite of an economy that is improving on many different fronts. With interest rates at generational lows, it”™s perplexing that many investors are attempting to fund their long-term liabilities, such as retirement, with investments meant to protect ”” not grow ”” an investor”™s principle.
As you structure portfolios, investors should be mindful of their investment time horizon, their need for liquidity and their tolerance for risk. Investors matching their portfolio with these three things put themselves in a position to be successful in spite of the inevitable downdrafts they will experience. Turbulent times can be unsettling and downright frightening to investors. Unfortunately, they are part of the deal for those looking to generate investment returns in excess of inflation and keep their portfolio growing as they start to make withdrawals.
Just like those moments on the plane when we become uncomfortable, long-term investments can cause us to second guess our decisions. With a little faith and courage, they both can get us to where we want to go.
Joseph Mathews is a financial adviser with the Global Wealth Management Division of Morgan Stanley Wealth Management on Post Road in Fairfield. He can be reached at 203-319-5165 or by email at joseph.matthews@morganstanley.com.Â
