"Investing isn't about beating others at their game. It's about controlling yourself at your own game."
- Jason Zweig
Jason Zweig, a columnist for The Wall Street Journal, offers his opinion on how humans are not hardwired to make good investment decisions. In the book Your Money & Your Brain, Mr. Zweig suggests the human brain is primarily driven by emotions when it comes to making decisions - mainly fear and greed. These emotions are valuable attributes for survival, but can become a detriment when dealing with investments.
"This is... Your Brain on Drugs"
Zweig states, "for most purposes of our daily life, your brain is a superbly functioning machine, instantly steering you away from danger while reliably guiding you toward basic rewards like food, shelter, and love. But that same intuitively brilliant machine can lead you astray when you face the far more challenging choices that the financial markets throw at you every day." Emotions such as fear or greed often trump logic, especially when fueled by certain behavioral biases, and leading us all to the same conclusion - we are really not as smart as we think we are
YOU are Your Own Worst Enemy
What causes us to have such poor judgment? Some of the more prominent behavioral biases include: regret avoidance, confirmation errors, familiarity bias, and irrational escalation.
Every year, DALBAR releases their Quantitative Analysis of Investor Behavior (QAIB) study, measuring the impact of investor behavior on investment returns. As we indicated in our last newsletter, the return received by the average equity investor severely lagged both the S&P 500 and Pillar's all-equity portfolio. Apply dollar amounts to those percentages and it reveals the startling differences in accumulated wealth based on a starting investment of $100,000 (almost $3M in 30 years!). DALBAR reports that psychological factors account for the bulk of this shortfall.
As I've indicated hundreds of times to investors - there is nothing which an advisor can do which will trump bad behavior on the part of the client. That's why at Pillar Capital we focus so much of our time and energies around helping clients be educated and control their behavior. At Pillar we manage more than just your assets - we manage emotions to help you stay the course...