Insights

Information about how investors really make decisions is being researched all the time. However, work in the field of behavioral finance — some of which has won the Nobel Prize in economics — has identified several key ways in which our brains trick us into seeing the investment world one way, when in reality it is something quite different. These cognitive biases include: Anchoring bias. This reflects our tendency to latch our thinking onto a reference point that we are familiar with — even
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“The dominant determinant of real-life, long-term investment outcomes is not investment performance, it’s investor behavior.”   — Nick Murray, author When it comes to investing, almost everyone knows you shouldn’t let short-term market movements compromise your long-term goals. Yet, on Monday, February 5, 2018, the Dow Jones industrial average experienced its largest point drop in history, and there were signs that some investors were beginning to panic. Two years without significant market volatility had caused some people to grow complacent and forget that
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As human beings, we have ingrained tendencies to let our short-term emotions guide our longer-term decisions, such as investing. For example, strong emotions can quickly cause us to misinterpret facts and make the wrong moves at the wrong time — repeatedly. To see how this cycle of emotions plays out in real life, consider the image below. It shows a hypothetical example of what happens to many investors. When the market is on the rise and racking up big gains,
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Throughout 2017, the S&P 500 Index recorded 62 new closing highs in 251 days of trading. In the first three weeks of January 2018 alone, the index crossed 10 new record closing highs in 13 days of trading. With stock indices continuing to set new highs, does this mean negative returns for stocks are on the horizon? When addressing this question, it is helpful to keep the following in mind: -Every day, stocks have a positive expected return regardless of
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Many months of stock market highs have led investors to ask, “How long is this going to last, and when should I get out?” Intuition tells us that after such a long period of sustained performance we might be due for a correction. This instinctive thinking also occurs in baseball, when a batter is “due” for a hit after a prolonged string of hitless at-bats, and in gambling, with the belief that you might be “due” to see the ball
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