February 2018 Newsletter to Clients

Enjoy this month’s edition that explores the human tendency to create bias and an important reminder on tax document mailings.

 

If you looked at Twitter or Facebook after the UK basketball team lost two games in a row recently – on the road to South Carolina and, even worse, at home to Florida – you would think the season was over. Distraught exclamations like, “I’m off the bandwagon”, “Cal’s one and done system doesn’t work” and “We’ll never make the tournament now” dominated the comments. There is a psychological term for this called momentum bias. Simply put, we tend to believe when things are going poorly they will continue to go poorly. Similarly, when we’re on a roll, we expect that to continue too. This same behavioral bias affects people’s views of the stock market. These emotions are quite normal and explains part of the value a good financial planner provides – we help remove the emotion from saving and investing by helping clients focus on their long-term goals. 

 

Now, it’s easy to get frustrated with this UK basketball team. They are talented but terribly inconsistent. Mind-boggling defensive lapses follow occasional flashes of offensive brilliance. We know they are the youngest team in the country because Coach Cal reminds us of this fact whenever he can but compounding this have been injuries to Quade Green and Jarred Vanderbilt. As a result, at times during the Florida game there were players on the floor who hadn’t played as a unit before in a real game….ever. But, even though we know these facts, our minds ignore them and only focus on what is in front of our faces – the mistakes and the losses. That is what is called availability bias. That is when we focus on the most recent data that is readily available to our brains, rather than taking into account all of the data on this team and this season. 

 

Momentum bias and availability bias both affect our views of the stock market too. As we watch our accounts grow each month it is quite tempting to believe it will continue that way. Let’s face it, we’re well into a 9-year Bull market. If availability bias limits our brains to the most recent data, it is easy to see why we only remember the up and focus less on the possibility the market will decline.

 

Little more than a year ago a friend moved half of his investments, about $350,000, into cash the day after the election. He was scared to death of the affect he thought a Trump presidency would have on the market and didn’t want to lose money when the market dropped after he took office. In other words, availability bias focused him on that small piece of data and he let that data control his emotions. And that focus steered him away from the entire data set showing the economy was already doing well, companies were earning money and he had a long-term goal, not just a one-year window. We told him in the fall that, had he been a client at election time, we would have advised him not to sell his investments and to maintain his course. If he had listened to us, he would have earned about an additional $45,000 during that period. 

 

As financial advisors, we focus on the long-term goals of you, our clients, so you can ignore the daily bombardment of short-term noise we all hear. In short, we help remove the emotion from decisions.

 

Tax Reports: In preparation for the upcoming tax season, the following important documents for 2017 will be mailed by: