As we
learn more about what makes investors tick, will it move
them? Calling on financial advisers to take a closer
accounting of how investors' mental errors can roil markets
and personal portfolios, AllianceBernstein Capital
Management Chairman Lewis Sanders recently devoted his
keynote address at the Morningstar mutual fund industry
conference to research on behavioral finance--and what to do
about it.
"Good [investments] alone aren't enough if
investors aren't using them intelligently," Sanders said.
Investor emotions move markets and can drag individuals from
one implausible scenario to the next, he said, noting a
string of behavioral research studies showing irrational
investor decision-making.
Among them were studies
showing investors trade too much. Others found investors, to
their detriment, overreach for certainty and gamble too much
to avoid losses. They find abhorrent the notion of
rebalancing a portfolio, or periodically siphoning off
winning investments into comparative poor performers that
might have more potential. They follow trends like lemmings,
often misreading market information and forming opinions
based on too narrow of a time frame.
"Investors are
not terribly introspective," Sanders said, urging financial
advisers to help investors tune into their mental
shortcomings. "As advisers, quality is not in the investment
return alone. Looming large is how clients feel along the
way," he said, adding that advisers should view this duty as
a way to keep clients from destructive behaviors.
Advisers, for their part, report that effort is already
under way, with mixed results.
"From a psychological
standpoint, investors are becoming more savvy, but too many
are learning just enough to be dangerous to their
portfolios," said Ty Bernicke, a financial planner in Eau
Claire, Wis. They may know that aggressive trading often
lowers returns, for example, but don't have a grasp of basic
investing tenets such as asset allocation--so they get stuck
in an undiversified portfolio too long.
Learning
about our biases educates us, but doesn't eliminate them,
said David B. Yeske, a San Francisco planner and past
president of the Financial Planning Association.
"Nothing we've learned about behavioral finance has changed
the way the human brain is wired," Yeske said, referring to
the field of economics that studies the impact of emotional
factors on markets and investing.
For evidence, he
said, just look at the real estate boom that is spurring
more people to leverage their mortgages to buy additional
properties or support fancier lifestyles.
"This is a
prime example of behavioral bias," he said. "I have several
clients who have bought [investment] properties in Arizona
and their impulse has been to take out equity immediately
and buy another property."
Investors have a tendency
to load up on previously winning investments, but Yeske said
he is managing at least to persuade clients to sell one
property before buying another to limit their exposure. It's
not much, but it's a start, he said.
"You can't
succeed by trying to work against people's biases," he said.
"You have to plunge deeper in and work with what's there."
Often, it means dredging up old family taboos about money,
he said, such as lingering aversions to certain types of
investments based on bad experiences with them in previous
generations. "Often, you have to reframe their whole outlook
about money," Yeske said. "Rather than arguing with them
about embedded attitudes about a certain investment, you
create a broader context for talking about outcomes."
When clients became skittish about stocks during the market
correction in 2000 and felt as though they had to react by
selling off certain ones, he said, he convinced them instead
to redirect that nervous energy into reviewing their overall
financial plans.
"They realized that a shaky market
wasn't going to push them too far off the mark in the long
run," he said.
But it can be a constant battle, said
Wisconsin financial planner Bernicke. "Re-education is more
important than ever," he said.
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E-mail Janet Kidd Stewart at yourmoney@tribune.com. Janet
Kidd Stewart
