How to apply behavioral finance to renew and improve investment management.
Emotional behavior and biases run throughout financial markets. The is the diagnosis of behavioral finance.
But it is not enough to know that investors make biased decisions. What do we do about it? How do we move beyond diagnosis, to prescription?
By C. Thomas Howard, PhD and Jason Apollo Voss, CFA
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. Finally, stock market volatility diminishes substantially over time, with a 75% decrease in variability for 10 years versus one year. As a result, developing patience and a long-term perspective are key to building wealth. We are living longer and need to invest appropriately. Even at age 70, the investment time horizon is more than 20 years.
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.