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behavioral

ADVISOR

Research and data-driven behavioral insights to guide client conversations.
February 2, 2024
Research shows that US investors expect real annual investment returns of more than double what financial professionals expect. In the short run, this is a recipe for unhappy investors as short-term returns rarely meet expectations. Eventually, this gap leads to even greater misalignment and deep dissatisfaction.

Do Markets Predict Recessions?

November 10, 2023
”The Stock Market has forecasted 9 out the last 5 recessions!” Nobel Prize Economist Paul Samuelson quipped in 1982. It turns out that the stock market is an unreliable predictor of recessions, as Samuelson so cleverly put it. A recent update confirms the stock market has a bit better than 50/50 prediction record, reporting that it has now predicted 13 out of the last 7 recessions! Was the recent market decline from January to October of 2022 another false signal?

Do Fees Help Identify Good Managers?

June 24, 2023
Mutual fund investors tend to focus on fees in order to find active equity managers that can outperform over the long run. While it is true that higher fees lead to lower performance on average, the data indicate you have an above-average chance of selecting an outperforming manager by simply picking from funds that have an annual expense ratio less than 1.5%.

A Different Kind of Bear

March 19, 2023
The last couple of years have been very unusual. 2020 was one of the most volatile markets in recent history but the S&P 500 Price Index finished with a positive return roughly double its annual average. 2022 was just the opposite. While there was little evidence of investor panic typical of Bear Markets, stocks significantly declined in value with the S&P 500 finishing the year down 19.4%.

How Long do Bear Markets Last?

December 7, 2022
The current Bear Market, defined as a loss of 20% or more from an all-time high, has lasted 11 months so far. But did the market hit its low point at -25% on October 13, or will there be more declines to come? While every Bear Market is different, history can provide some perspective on where we are now. The median duration of the decline for the 11 Bear Markets charted below is 15 months while the median loss is 34%.

Bear Market Rally or New Bull Market?

August 22, 2022
Investors wonder about the current bear market and want to know if we are “out of the woods” or if there is “more pain to come”. The graphic below shows that the stronger the rally, the higher the probability that the bear market will end. After a 17.4% rally from the June S&P 500 lows, there is a low probability (3.6%) that the current rally will fail. However, if it does fail, the historical average decline from these levels to the ultimate bear market low would be 31% and take seven months.

War and Markets

March 24, 2022
Armed conflicts are highly charged events that by their very nature generate legitimate and strong emotional responses. While there are many questions and implications around armed conflicts, as long-term investors, an important question is what we should do from an investment perspective? For guidance, we look at how the US stock market has reacted to 16 armed conflicts since the end of World War II.

Nobody Can See the Future

January 13, 2022
It’s that time again where everyone is offering their views on the upcoming year, with market commentary and outlooks. Last year’s results, data and opinion are assembled into a narrative along with forecasts and implied recommendations. Investors seeking to reduce uncertainty and anxiety are easily attracted to such prognostications.

How to Avoid Overreacting to Taxes

November 15, 2021
With the sharp market rebound, investors may find sizeable gains and tax consequences in their portfolios. Few things generate a more emotional response than taxes. Deciding to hold or sell an investment based purely on the tax consequences is usually at odds with maintaining a disciplined investment process. Ultimately, marginal differences in tax treatments are not as significant as we might imagine.

More Choices, More Confusion

October 6, 2021
There has been an overwhelming growth in the number of investment choices over the last 20 years, as asset managers compete for investment dollars. As a result, many investors are easily overwhelmed by the sheer volume of investments and confused about what investments they should have. The chart below highlights this explosion in today’s marketplace.

What to do with an Investment Windfall

June 11, 2021
Investors spend a lot of time and energy talking about the next big market crash or how to avoid large losses. The opposite side of that coin is what to do when faced with large, unexpected investment gains. It’s natural to want to spend at least some of this “free money,” but before you rush out and buy something, take a few minutes to think about the advantages of not doing that.

Don’t Fall for the Trading Game

April 29, 2021
Last year’s market roller coaster ended with a rapid and dramatic surge upward followed by amplified short-term volatility. Understandably, these conditions have left investors wondering what to do now and many are tempted to take profits, pull out of the market, or wait on the sidelines.

Regular Contributions Drive Wealth

March 14, 2021
Many investors wait until they have “enough” money or for when it’s “a good time” to invest in the market. Making regular contributions regardless of these concerns is one of the most powerful ways to build wealth. The table below highlights the value of making regular contributions compared to periodic contributions over 10-, 20- and 30-year periods. Even though the same principal amount is invested, the result is dramatically different with nearly twice the wealth creation.

Investing Through the Headlines

December 5, 2020
After the year we have had its easy to understand how investors may have become fatigued and disoriented. Taking a step back and looking at things over a longer time period can help to regain a sense of balance and perspective. The ability to look past today’s headlines is key to long-term investing. Over the ten-year period of 2010 – 2019, the market generated an impressive annualized return of 13.6%, but you would not have known it from the headlines.

Don’t Hesitate to Build Your Wealth

November 10, 2020
Investors often fret about the market environment and ask if they should invest now or hold off for a better time. For long-term investors, making regular contributions is more important than when the contributions are made each year. The table below shows there is not much gained by perfectly timing contributions each year.

Your Investments are Non-Partisan

August 17, 2020
With the election year fury reaching its apex, it is easy to believe that political outcomes in November will have a significant impact on your investments. The table below looks at how markets have fared depending on who controls the White House, Senate and House of Representatives. Interestingly the markets have done best when Republicans control Congress and Democrats control the White House.

Beware Predictions and Magic Elixirs

July 28, 2020
The market and economy have gone through unprecedented events with a global pandemic, the shut-down of economies, massive government intervention and dramatic market swings. In the wake, marketers and pundits are in full force touting recent short-term results along with market predictions and a slew of slick products to go with them. While things may have stabilized, there is still an abundance of uncertainty. Now is not the time to make dramatic changes to your overall investment approach. Taking a long-term perspective can help to avoid costly mistakes.

Invest For The Decade, Not The Year

January 20, 2020
The decade closed with equities appreciating 257% and advancing in eight of 10 years in the 2010’s. But have the markets become so overvalued that the coming decade will bring low or even negative returns? For some historical perspective on the subject, we look at the past nine decades. Remarkably, the 2010’s represent the most average decade of any over the 90-years. Investors tripled their money (204% unannualized return) and experienced 7.5 positive return years in an average decade for the period.

The Best Strategies for Building Wealth

November 25, 2019
One of the underappreciated aspects of active management is the ability to build a well-curated portfolio of mutual funds that pursue unique investment strategies. The chart below shows the aggregate performance of ten active US equity strategies over the last thirty-eight years. Allocating to the top strategies and avoiding the bottom strategies can dramatically improve long-term performance.

How Long Can A Good Fund Look Bad?

September 27, 2019
It’s only natural for someone invested in a poorly performing active equity mutual fund to wonder if it’s time to make a change. Should an investor sell a fund if it trails its benchmark for a year? Three years? Five years?

Putting Market Declines In Perspective

August 14, 2019
Even though we all know market fluctuations are a normal part of equity investing, large market declines can be scary because they often happen rapidly and feel random.

Long-Term is Longer Than You Think

June 25, 2019
Investment time horizon is a critical concept in building wealth. Most investors have very long investment time horizons, typically decades or more. Investment managers also require long time horizons to deliver on their investment thesis.

The Power of Planning

April 24, 2019
Planning is a powerful tool to help investors succeed and achieve better outcomes. The table below highlights the benefits of planning taken from a study on retirement planning among Americans over age 50. The results show that having and sticking to a plan results in three times the net worth when compared to those who don’t have a plan.

Why Invest Now? A Tale of Three Investors

March 13, 2019
“Now’s not a good time to invest,” or “I’m waiting for the right conditions” are familiar refrains we hear from investors and advisors alike. Fortunately for long-term investors who don’t take regular withdrawals from their portfolios, the sequence of returns doesn’t affect the ultimate investment outcome.

Does the Economy Predict Stock Returns?

February 13, 2019
Investors, economists and the media spend an enormous amount of time and energy trying to forecast the economy. The idea is that forecasting economic growth will give us an idea of where the stock market is headed. Surprisingly, no predictive relationship exists between current economic conditions and the current stock market.

What’s Your International Exposure?

November 26, 2018
The surging US economy and stock market have left international markets behind, with the S&P 500 Index beating the MSCI EAFE Index1 by 7.1% per year for 11 years. But US equities don’t always outperform the rest of the world, and the potential of international equity returns shouldn’t be overlooked. Currently, most investors are under-allocated to international equities and now might be a good time to invest more overseas.

How Long Do Market Expansions Last?

October 5, 2018
There is mounting concern about geopolitics, interest rates, the economy and the length of the current market expansion. A long-term view can help to put things in perspective and perhaps relieve some anxiety.

Is Your Portfolio Global Mush?

August 27, 2018
Most investors end up with over-diversified portfolios that are costly and deliver poor performance. The typical asset allocation model and subsequent investment in a group of diversified funds often results in a portfolio of “Global Mush” with literally thousands of tiny positions.

How to Tune Out the Noise

July 29, 2018
Once again, we’re experiencing an upsurge in the noise around market volatility, increasing concerns about a trade war with China and future monetary policy. This can be overwhelming for the average investor and certainly hard to know when to be concerned and when to tune out the noise.

Why Stocks Aren’t Risky

June 25, 2018
While stocks deliver unpredictable returns in the short-run, stocks are the least risky choice to build wealth over longer time periods. As the investment horizon increases, loss of purchasing power becomes the main risk.

Where are we now?

May 29, 2018
After last year’s tranquil environment, markets experienced a sharp pullback in February and have returned to a more normal level of volatility. As a result, many investors are wondering, where are we now and what’s next? The chart below highlights how recent events compare to the prior 11 corrections.

What do Rising Rates Mean for Investors?

April 14, 2018
With the surging economy and the recent shift in monetary policy, many investors are worried about rising interest rates and potential inflation. A little historical information can provide valuable perspective.

Diversify by Strategy to Stay on Track

February 26, 2018
It’s important for investors to understand how different investment strategies work and how each performs under various market conditions. The chart below highlights 10 investment strategy groups and their performance ranking over the last decade. When building long-term growth portfolios, allocating among different strategies can help to reduce anxiety without sacrificing returns.

What should investors expect in 2018?

January 29, 2018
The last few years in the market have been as good as it gets with strong economic growth, increasing profitability, low volatility and surging markets. Everyone wants to know how long will the party last and what will the market do next? As the table below shows, there is little mystery regarding the new year’s expected return.

The Case for Value Now

December 19, 2017
Since the 2009 financial crisis, value investing has struggled to keep up with the broad market and had an even tougher time keeping pace with high-flying growth stocks. This long stretch has led investors to consider dumping their value investments for passive indexing or growth strategies. We think a little long-term perspective is needed and dumping value for growth now could be a costly mistake.

The Consequences of Product Proliferation

November 15, 2017
Access and choice are not always a good thing. Investing has become too complex and overwhelming, with a myriad of choices and the endless stream of information that accompanies them. This is further compounded by the ease with which investments can be bought and sold. Confronted with this, many investors become paralyzed or impulsively buy and sell, in an elusive attempt to keep up.

Use Needs Rather than Fear for Allocation

September 21, 2017
Many advisors use risk tolerance to determine how to allocate client assets, putting clients in buckets of conservative, moderate or aggressive based on the question “How scared are you?” This approach can result in poor risk management, significant misallocation of resources and a high degree of anxiety. A better approach is to use a needs-based planning process to match resources to client goals.

Look Beyond Cost for Active Management

August 14, 2017
Focus on low-cost equity mutual funds has increased dramatically in the past decade. While cost matters, mutual funds, much like other goods and services, should be evaluated based on what investors get for the price they pay. Indeed, few people start shopping for a car by asking, “What’s the cheapest car I can get?”

Market Peaks: What Happens Next?

June 29, 2017
When the equity market sets a new all-time high, many people become anxious about what will happen next. It turns out that new market peaks are common, occurring 1,144 times from January 3, 1928 through May 31, 2017, or once a month on average.

The Wall of Worry

May 31, 2017
The last eight years have been a good period for equity investing. But can it last? As the old saying goes, “Markets climb a wall of worry.” There is certainly plenty to worry about: looming market corrections, elections in Europe, and political uncertainty.

Reframing Performance with Better Charts

April 30, 2017
Most people rely on the mountain chart, a line or area chart which shows the growth of an investment over time, as a basis for evaluating performance. This type of presentation, which emphasizes volatility, timing, and emotionally charged events like 2008 has inherent biases that distort how we view performance and obscures the real long-term probability of a successful outcome.

Why Expected Returns Matter Most

February 24, 2017
The current emphasis on low volatility and non-correlated multi-asset portfolios, created by blending equities, bonds and alternatives, can lead to unnecessary over-diversification and result in significant underperformance for long-term investors. Lost in the myopic obsession with volatility and correlations is the overwhelming importance expected returns play in any growth-oriented strategy.

What Will the Stock Market do this Year?

January 30, 2017
At the beginning of each year, investors want to know what the stock market will do over the course of the next 12 months. Countless experts weigh in on the matter. However, as the table below demonstrates, there is little mystery regarding the new year’s expected market return.

How Will Rising Rates Impact Stocks?

December 28, 2016
Now that the Fed has decided to begin raising rates, the focus has turned to how these decisions might affect stock returns. The chart below reports the return impact for the dozen times during which the 10-year US Treasury Bond rate increased by more than one percent over the last 45 years. The annual S&P 500 return averaged 13.4% over these 12 periods, higher than the long-term average of 10%, and was positive in nine of these periods.

The Power of Dividend Stocks

November 28, 2016
In today’s low-rate environment, dividend stocks represent an attractive alternative to bonds for generating both income and long-term growth. Separating the total return of the S&P 500 Index into the dividend and capital appreciation components shows the stability of dividend income going back to the 1920’s with an average yield of 4.0%.

Does the Election Matter?

October 21, 2016
The presidential election has generated especially strong emotions this go-around. Both sides fear the other candidate will win and many believe that as a result the economy will go into a death spiral. This fear is driving many investors out of the market, waiting on the sidelines for the outcome.

Exceptional Performance is Turbulent

August 15, 2016
The perfect portfolio may not look like what you think. A common fallacy is that good active equity funds should deliver consistently good short-term performance with smooth upward trending returns. Investors who believe this have unrealistic expectations and often dump good investments too quickly thereby losing out on great long-term returns.

Don’t Miss Out on Market Rebounds

June 30, 2016
One of the most common and costly mistakes made by investors and professionals alike is making panic-related sell decisions. Getting out of the market based on market noise and perceived risks often leads to significant underperformance because it requires impeccable timing with respect to both exiting and reinvesting into the market.

The Emotion of Market Declines

May 9, 2016
Even though we all know market fluctuations are a normal part of equity investing, large market declines are scary to most investors because they often happen rapidly and feel random.