Behavioral finance applied: Strategies, not style boxes
Published on Proactive Advisor Magazine May 6, 2020
Applying behavioral finance concepts to fund manager behaviors has proven helpful in selecting top-performing equity funds.
In an earlier Proactive Advisor Magazine article, I presented a framework, based on five concepts, for implementing behavioral finance throughout the advising and investment-management process. The fourth of these five foundational ideas states that alternative behavioral tools can be developed for operating in financial markets.
In this article, I discuss how behavioral tools can be used to select and then evaluate an active equity fund, along with constructing an equity fund portfolio. Like every aspect of investing, these decisions are fraught with emotional triggers and, if not properly handled, often lead to poor performance. Applying behavioral concepts can help financial advisors avoid a number of cognitive errors in the construction and management of such portfolios.
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