We are experiencing a new peak in the rhetoric around trade, geo-politics, the economy and the business cycle. We have also seen increased market volatility. It can be hard to know when to be concerned and when to tune out the noise. Having a consistent framework for viewing markets with a long-term perspective can be a valuable tool to help avoid costly behavioral mistakes. While there may be a heightened sense of fear in the headlines, based on our Market View, there is no reason to sound the alarm.
New York Times Best Selling Author Daniel Crosby PhD, Chief Behavioral Officer of Brinker Capital and C. Thomas Howard PhD, CEO and Chief Investment Officer of AthenaInvest joined us for a discussion on the application of behavioral finance. In this one hour replay, we explored how psychological factors influence decision making and how behavioral finance is changing the art and science of investment management.
We are witnessing a dramatic flow of money out of active equity mutual funds and a similarly sized flow into index funds. A large portion of these outflows are from so-called closet indexers, funds that claim to be active equity managers but, upon closer inspection, closely track an index while charging active fees. Investors have wised up to this and are heading for the exits, moving into much lower-fee passive funds that provide the same underlying equity return.
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.
“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.
The widely accepted style grid of market capitalization and price-to-earnings ratios was largely arbitrary in design, lacking substantial research or academic foundation. An alternative framework based on how managers actually manage their portfolios and organizing around those investment strategies provides a superior alternative for organizing and comparing funds.