A tomorrow more certain than today?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Suppose I asked you what you would be doing in 5 minutes. Odds are, you would be able to answer that question with some high degree of certainty. After all, it will probably look a bit like what you are doing at the time you were asked. Now, let’s move the goalpost back a bit and imagine that I asked you what you would be doing five weeks from now. It would certainly be exponentially harder to pinpoint, but your calendar may give some clues as to how you will be engaged at that time. Now imagine you were asked to forecast your actions five months, five years, or even fifty years from now – damn near impossible, right? Of course, it is because, in our quotidian existence, the present is far more knowable than the distant future.

What complicates investing then, is that the exact reverse is true. We have no idea what will happen today, very little notion of what next week holds, a slight inkling as to potential one-year returns but could take a pretty solid stab at 30 years from now. Consider the long-term performance of stocks by holding periods:a tomorrow more certain than today

Over short periods of time, returns are nearly unknowable. Stocks are up about 60 percent of the time and down about 40 percent of the time, but the highs and lows are both very dramatic. Over a period more reflective of a long-term investment horizon, however, the future becomes far more certain. Returns average just over 10 percent per year, with the worst case being around 6 percent and the best case being nearly 15 percent. Not so scary anymore, but it does require a fundamental rethinking of reality, something that seems not to be happening. As statistician extraordinaire Nate Silver says in The Signal and the Noise:

“In the 1950s, the average share of common stock in an American company was held for about six years before being traded – consistent with the idea that stocks are a long-term investment. By the 2000s, the velocity of trading had increased roughly twelvefold. Instead of being held for six years, the same share of stock was traded after just six months. The trend shows few signs of abating: stock market volumes have been doubling once every four or five years.”

Intuition tells us that “now” is more knowable than “tomorrow” but Wall Street Bizarro World (WSBW) says otherwise. As Silver points out, more access to data and the disintermediary effects of technology make our tendency toward short-termism even greater. But the growing impatience of the masses only serves to benefit the savvy investor. As Ben Carlson says in A Wealth of Common Sense, “Individuals have to understand that no matter what innovations we see in the financial industry, patience will always be the great equalizer in financial markets. There’s no way to arbitrage good behavior over a long-time horizon. In fact, one of the biggest advantages individuals have over the pros is the ability to be patient.”

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

45 things smart investors never say

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

1. Fear of political strife – “I don’t like the President”

2. Concentrated position – “My grandfather gave me this stock”

3. Impersonal benchmarks – “Why am I down versus the S&P 500?”

4. Market timing – “Is now a good time to invest?”

5. Home bias – “Europe? I prefer the Red, White, and Blue!”

6. Tangibility bias – “I like to invest in things that I can hold”

7. Friendship bias – “I like to invest in people I know”

8. Anchoring/ “breakevenitis” – “I’ll sell when it gets back to what I paid for it”

9. Selling winners too quickly – “You never go broke taking a profit”

10. Mere exposure effect – “Buy what you know”

11. Zero risk bias – “I’ll keep this dry powder for a rainy day”

12. Performance chasing – “This has been hot…”

13. IPO investing – “Have you heard of this new company…?”

14. Shifting risk tolerance – “I’m a high-risk high-reward person”

15. Ostrich effect – “Why mess with a good thing?” (complacency)

16. Confirmation bias – “All of my friends say…”

17. Overconfidence – “It won’t happen to me…”

18. Hindsight bias – “How did you do in 2008?”

19. Restraint bias – “I’ll jump on the next March 2009”

20. Self-serving bias – “Why aren’t my returns higher?” (two-way street)

21. Affect heuristic – “I’m going with my gut on this one…”

22. Appeal to authority – “But Jim Cramer said…”

23. Status quo bias – “Rebalance? Why bother?”

24. Hyperbolic discounting – “I’ll start saving later…”

25. Gambler’s fallacy – “I’m on a roll!”

26. Herding – “My friend told me to check out…”

27. New era thinking – “Yeah, but this time is different…”

28. Representativeness – “This will be the Great Depression all over again”

29. Bias blind spot – “But I would never do that!”

30. Ambiguity aversion – “Why can’t you just give me a straight answer?”

31. Babe Ruth Effect – “Why did you have me in last year’s big winner?”

32. Dread risk – “I’m gonna buy gold”/ “What about the zombie apocalypse?”

33. Fundamental attribution error – “Why aren’t you beating the market? I could do better myself!”

34. Illusory pattern recognition – “This chart looks just like 1929!”

35. Money illusion – “I’m a millionaire! What do you mean keep working?”

36. Myopic loss aversion – “Excuse me, I have to make some hedging trades.”

37. Sunk cost fallacy – “Well, we’ve already gone this far so…”

38. Turkey illusion – “Recession? Never heard of it.”

39. Fetish for complexity – “I need hedge fund exposure! What am I paying you for?”

40. Declinism – “The way I see it, the world is just going to hell”

41. Framing – “Save 10%? Impossible.”

42. Illusory truth effect (believing a market myth frequently repeat) – “Sell in May and go away”

43. Information bias – “Let me just turn on CNBC”

44. Outcome bias – “You told me not to buy individual stocks and it went up. Ha!”

45. Post-purchase rationalization – “I mean, I NEEDED that.”

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

You will never regret your vacation

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Bronnie Ware is an Australian nurse who has spent her career in a palliative care unit, caring for those with very little time to live. As someone who interacts with the dying, she has had the privilege of speaking with these people about the things that make their life worth living, as well as what they wish they’d done differently. Ware summarized the top five regrets of those about to pass on in her excellent blog, “Inspiration and Chai.” The “Top Five Regrets of the Dying” are:

  1.  I wish I’d had the courage to live a life true to myself, not the life others expected of me.
  2.  I wish I hadn’t worked so hard.
  3.  I wish I’d had the courage to express my feelings.
  4.  I wish I had stayed in touch with my friends.
  5.  I wish I had let myself be happier.

Notice, not one mention of money and the only mention of work is to say they (especially male patients) wished they had done less of it. If you are like me (and perhaps like most people), you are chasing the wrong dream and setting the wrong goals. As you sit and evaluate your life as it draws to a close, I promise you that you will never regret the year your portfolio underperformed the benchmark, but you may well regret lost time spent living a life that confused money with what matters much more.

The Path Forward
In a money-obsessed world that has socialized us to chase the almighty dollar, it can be weirdly unsettling to learn that money isn’t everything. As much as we whine about money, having something that is the physical embodiment of happiness is nice. We can hold it, save it, get more of it, all while mistakenly thinking that getting paid is how we “arrive.” Realizing that money does not directly equate to meaning can leave us with a sense of groundlessness but once we’ve stripped away that faulty foundation, we can replace it with things that lead to less evanescent feelings of happiness. Breaking your overreliance on money as a substitute for real joy is a great first step, here are two ways to move forward upon having made this important realization:

Spend money in ways that matter – Let’s be balanced in the way we talk and think about money. It’s not the key to happiness, but it’s not nothing either. A lot of our troubles with money stem from the way we spend it. We think that buying “things” will make us happy. We engage in retail therapy which is quickly followed by feelings of regret at being overextended. Before we know it, we’re surrounded by the relics of our discontent; the things we bought to be happy become constant reminders that we’re not.

Instead of amassing a museum of junk, spend your money on things of real value. Spend a little more on quality, healthy food and take the time to savor your new purchases. Use your money to invest in a dream – pay yourself to take a little time off and write that novel about which you’ve always dreamt. Give charitably and experience the joy of watching those less fortunate benefit from your wealth. Finally, spend money on having special experiences with your loved ones. It’s true that money doesn’t buy happiness, but it can do a great deal to facilitate it if you approach it correctly.

Find a new metric – Part of the appeal of money as a barometer for happiness is that it’s so…well…quantifiable. Meaning, joy, happiness, and fulfillment are all abstractions that can be hard to get our hands around. Thus, we aim for something we can count (but end up sadly disappointed). So, take things that really will make you happy and try to come up with metrics for those things instead. Maybe you enjoy painting and you could set a goal to complete three new pieces by the end of the summer. Perhaps you want to be more service oriented and you could set a goal to engage in a charitable act each week. The impulse to measure happiness is a natural and good one, let’s just make sure we’re using a yardstick that delivers on its promises.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

Why outcomes beat fear

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

It seems to be human nature to be fascinated by pathology. Sigmund Freud began his study of the human psyche by outlining how it was broken (hint: your Mom) and the discipline continued down that path for over a century. It was roughly 150 years before the study of clinical psychology was offset at all by the study of what we now call “positive psychology” – the study of what makes us happy, strong, and exceptional. Perhaps it is no surprise then that behavioral finance too began with the study of the anomalous and is only now coming around to a more solution-focused ideal. While a thorough review of the transition from efficient to behavioral approaches isn’t why we are here, it’s worth considering the rudiments of these ideas and how we can improve upon them.

For decades, the prevailing economic theories espoused a view of Economic Man as rational, utility maximizing, and self-interested. On these simple (if unrealistic) assumptions, economists built mathematical models of exceeding elegance but limited real-world applicability. It all worked beautifully, until it didn’t. Goaded only by a belief in the predictability of Economic Man, The Smartest People in the Room picked up pennies in front of steamrollers – until they got flattened.

On the strength of hedge fund implosions, multiple manias with accompanying crashes and mounting evidence of human irrationality, Economic Man begin to give way to Behavioral Man. Behavioral proponents began to document the flaws of investors with the same righteous zeal with which proponents of market efficiency had previously defended the aggregate wisdom of the crowd. At my last count, psychologists and economists had uncovered 117 documented biases capable of obscuring lucid financial decision-making. One hundred and seventeen different ways for you to get it wrong.

But the problem with all this Ivory Tower philosophizing is that none of it truly helps investors. For a clinical psychologist, a diagnosis is a necessary but far from sufficient part of a treatment plan. No shrink worth his $200 an hour would label you pathological and show you the door, yet that is largely what behavioral finance has given the investing public: a surfeit of pathology and a shortage of outcomes.

To consider firsthand the futility of being told only what not to do, let’s try the following.

“Do not think of a pink elephant.”

What happened as you read the first sentence of this section? Odds are, you did the very thing I asked you not to do – you imagined a pink elephant. How disappointing! You could have imagined any number of things – you had infinity minus one option – and yet you still disobeyed my simple request. Sigh. Oh well, I haven’t given up on you yet, so let’s try one more time.

“Do not, whatever you do, imagine a large purple elephant with a parasol daintily tiptoeing across a highwire connecting two tall buildings in a large metropolitan area.”

You did it again, didn’t you?

All feigned anger aside, what you just experienced was the very natural tendency to imagine and even ruminate on something, even when you know you oughtn’t. Consider the person on a diet who has created a lengthy list of “bad” foods. He may, for instance, repeat the mantra, “I will not eat a cookie. I will not eat a cookie. I will not eat a cookie.” any time he experiences the slightest temptation.

But what is the net effect of all his self-flagellating rumination? Effectively he has thought about cookies all day and is likely to cave at the first sign of an Oreo. The research is unequivocal that a far more effective approach is to reorient that behavior into something desirable rather than repeat messages of self-denial that ironically keep the “evil” object top of mind. Unfortunately for investors in a panic, there are far more histrionic “Don’t do this!” messages than constructive “Do this instead”, which is where The Center for Outcomes comes in. At the Brinker Capital Center for Outcomes, we have taken behavioral finance out of the textbooks and are putting it in the hands of advisors where it belongs. By utilizing our empirically-based, four-step process, advisors are given specific tools for communicating with clients in a persuasive manner. Click here to learn how to say “Yes” to outcomes.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice.  

Brinker Capital, Inc., a registered investment advisor. 

The do’s and don’ts for periods of market volatility

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

We know it has been a stressful week for everyone involved in the market. In times like this, knowing what not to do is just as important as knowing what to do. Therefore, we created a list of things you should and shouldn’t be doing in periods of market volatility.

Do:

  • Do know your history
    • Despite what political pundits and TV commentators would have you believe, this is not an unusually scary time to be alive. Although you would never know it from watching cable, the economy is growing and most quality of life statistics have been headed in the right direction for years! Markets always have and always will climb a wall of worry, rewarding those who stay the course and punishing those who succumb to fear. Warren Buffet expressed this beautifully when he said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shock; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Such it has ever been, thus will it ever be.
  • Do take responsibility
    • Which of the following do you think is most predictive of financial performance: a) market timing b) investment returns or c) financial behavior? Ask most men or women on the street and they are likely to tell you that timing and returns are the biggest drivers of financial performance, but the research tells you another story. In fact, the research says that you – that’s right – you, are the best friend and the worst enemy of your own portfolio. What happens in the financial markets in the coming years is absolutely out of your control. But, your ability to follow a plan, diversify across asset classes, and maintain your composure is squarely within your own power. At times when market moves can feel haphazard, it helps to remember who is really in charge.
  • Do work with a professional
    • Odds are that when you chose your financial advisor, you selected him or her because of his or her academic pedigree, years of experience, or a sound investment philosophy. Ironically, what you likely overlooked entirely is the largest value he or she adds – managing your behavior. Studies from across the industry put the added value from working with an advisor at 2 to 3% per year. Compound that effect over a lifetime and the power of financial advice quickly becomes evident.

Don’t:

  • Don’t equate risk with volatility
    • Repeat after me, “volatility does not equal risk.” Risk is the likelihood that you will not have the money you need at the time you need it to live the life you want to live. Nothing more, nothing less. Paper losses are not “risk” and neither are the gyrations of a volatile market.
  • Don’t focus on the minute-to-minute
    • Despite the enormous wealth-creating power of the market, looking at it too closely can be terrifying. A daily look at portfolio values means you see a loss 46.7% of the time, whereas a yearly look shows a loss merely 27.6% of the time. Limited looking leads to increase feelings of security and improved decision-making.
  • Don’t give into action bias
    • At most times and in most situations, increased effort leads to improved outcomes. Want to lose weight? Start running. Want to learn a new skill set? Go back to school. Investing is that rare world where doing less actually gets you more. James O’Shaughnessy of “What Works on Wall Street” relates an illustrative story of a study done at Fidelity. When they surveyed their accounts to see which had done best, they uncovered something counterintuitive: the best-performing stocks were those that had been forgotten entirely.

The Center for Outcomes, powered by Brinker Capital Holdings, has developed an educational program to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

Brinker Capital is a privately held investment management firm with $21.7 billion in assets under management (as of December 31, 2017). For 30 years, Brinker Capital’s purpose has been to deliver an institutional multi-asset class investment experience to individual clients. Brinker Capital’s highly strategic, disciplined approach has provided investors the potential to achieve their long-term goals while controlling risk. With a focus on wealth creation and management, Brinker Capital serves financial advisors and their clients by providing high-quality investment manager due diligence, asset allocation, portfolio construction, and client communication services. Brinker Capital, Inc. is a registered investment advisor.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

 

 

 

Top blog posts of 2017

We’re closing out the year with our top five blog posts of 2017. From retirement and behavioral finance, to in-depth market perspectives, these are the best of 2017. Enjoy!

Jeff Raupp, CFARaupp_Podcast_Graphic, Director of Investments

Investment Insights Podcast: Where markets go from here now that they’ve rallied post-election

 

 

CookPaul-150-x-150

Paul Cook, AIF®, Vice President and Regional Director, Retirement Plan Services

Avoiding retirement regrets

A dozen steps to a smooth transition to retirement

 

Crosby_2015-150x150Dr. Daniel CrosbyExecutive Director, The Center for Outcomes & Founder, Nocturne Capital

Can money buy happiness?

Purchasing power and the big power of small changes

You Don’t Have a Plan

frank_randallFrank Randall, AIF®, Regional Director, Retirement Plan Services

People anticipate that they will finish their own tasks earlier than they actually do. Consider the following example. Employees who carry home a stuffed briefcase full of work on Fridays, fully intending to complete every task, are often aware that they have never gone beyond the first one or two jobs on any previous weekend.

The psychological term for this is called “planning fallacy” and it is the reason that we are often a day late and a dollar short. In a phrase, the planning fallacy is the human tendency to underestimate the time and resources necessary to complete a task. When applied to a lifetime of financial decision-making, the results can be catastrophic.

There are a variety of hypotheses as to why we engage in this sort of misjudgment about what it will take to get the job done. Some chalk it up to wishful thinking. A second supposition is that we are overly optimistic judges of our own performance. A final notion implicates “focalism” or a tendency to estimate the time required to complete the project, but failing to account for interruptions on the periphery.

Whatever the foundational reasons, and it is likely there are many, it is clear enough that the American investing public has a serious case of failure to adequately plan. Excluding their primary home value, 56% of Americans either have less than $10,000 or no retirement savings at all. 43% of Americans are just 90 days away from poverty and 48% of those with workplace retirement savings plans fail to contribute.1 Perhaps we think we are special. Maybe we are simply too focused on the day-to-day realities that can so easily hijack our attention. Without a doubt, we may wish that the need to save large sums of money for a future date would just resolve itself.

Solution: Antoine de Saint-Exupery famously said, “A goal without a plan is just a wish” and yet the majority (60%) of investors surveyed by Natixis in 20142 said that they had no formal financial plan or goals. If you do not have a formal, updated financial plan in your possession, you lack the road map necessary to begin the journey toward retirement. Most financial planners are happy to create such a plan for a small fee so start today!

For 10 years, Brinker Capital Retirement Plan Services has been working with advisors to offer plan sponsors the solutions to help participants reach their retirement goals.  The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Sources:

1 “Myth of the Middle Class:  Most Americans Don’t Even Have $1,000 in Savings,” www.salon.com, Ben Norton, January 14, 2016.

2 “Getting to the Goal:  Markets, emotion and the risks advisors must manage,” Natixis, 2014

Diversification: It’s Not Beauty and the Beast, but Still a Tale as Old as Time

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Hedge fund guru Cliff Asness calls it “the only free lunch in investing.” Toby Moskowitz calls it “the lowest hanging fruit in investing.” Dr. Brian Portnoy says that doing it “means always having to say you’re sorry.” We’re speaking, of course, of diversification.

Diversification, or the reduction of non-market risk by investing in a variety of assets, is one of the hallmarks of traditional approaches to investing. What is less appreciated, however, are the ways in which it makes emotional as well as economic sense not to have all of your eggs in one basket. As is so often the case, the poets, philosophers and aesthetes beat the mathematicians to understanding this basic tenet of emotional self-regulation. The Bible mentions the benefits of diversification as a risk management technique in Ecclesiastes, a book estimated to have been written roughly 935 BC. It reads:

But divide your investments among many places, for you do not know what risks might lie ahead. (Ecclesiastes 11:2)

The Talmud too references an early form of diversification, the prescription there being to split one’s assets into three parts—one third in business, another third in currency and the final third in real estate.

The most famous, and perhaps most eloquent, early mention of diversification is found in Shakespeare’s, The Merchant of Venice, where we read:

My ventures are not in one bottom trusted,

Nor to one place; nor is my whole estate

Upon the fortune of this present year:

Therefore my merchandise makes me not sad. (I.i.42-45)

It is interesting to note how these early mentions of diversification focus as much on human psychology as they do the economic benefits of diversification, for investing broadly is as much about managing fear and uncertainty as it is making money.

Don't put your eggs in one basketBrought to the forefront by Harry Markowitz in the 1950s, diversification across a number of asset classes reduced volatility and the impact of what is known as “variance drain.” Variance drain sounds heady, but in a nutshell, it refers to the detrimental effects of compounding wealth off of low lows when investing in a highly volatile manner. Even when arithmetic means are the same, the impact on accumulated wealth can be dramatic. (This is not the same as the more widely used annualized return numbers, as they account for variance drain, but for this illustration, we’ll look specifically at variance drain.)

Say you invest $100,000 each in two products that both average 10% returns per year, one with great volatility and the other with managed volatility. The managed volatility money rises 10% for each of two years, yielding a final result of $121,000. The more volatile investment returns -20% in year one and a whopping 40% in year two, also resulting in a similar 10% average yearly gain. The good news is that you can brag to your golf buddies about having achieved an average return of 40%—you are an investment wizard! The bad news, however, is that your investment will sit at a mere $112,000, fully $9,000 less than your investment in the less volatile investment since your gains compounded off of lower lows. (To account for this, the investment industry uses annualized returns, which account for variance drain, rather than average returns.)

Managing variance drain is important, but a second, more important benefit of diversification is that it constrains bad behavior. As we’ve said on many occasions, the average equity investor lags the returns of the equity market significantly. It is simply hard to overstate the wealth-destroying impact of volatility-borne irrationality. The behavioral implication of volatile holdings is that the ride is harder to bear for loss-averse investors (yes, that means you).

As volatility increases, so too does the chance of a paper loss, which is likely to decrease holding periods and increase trading behavior, both of which are correlated with decreased returns. Warren Buffett’s first rule of investing is to never lose money. His second rule? Never forget the first rule. The Oracle of Omaha understands both the financial and behavioral ruin that come from taking oversized risk, and more importantly, the power of winning by not losing.

DiversificationAt Brinker Capital, we follow a multi-asset class investing approach because we believe that broad diversification is humility in practice. As much as experts would like to convince you otherwise, the simple fact is that no one knows which asset classes will perform well at any given time and that diversification is the only logical response to such uncertainty. But far from being a lame concession to uncertainty, the power of a multi-asset class approach has the potential to deliver powerful results. Take, for example, the “Lost Decade” of the early aughts, thusly named because investors in large capitalization U.S. stocks (e.g., the S&P 500) would have realized losses of 1% per annum over that 10-year stretch. Ouch. Those who were evenly diversified across five asset classes (U.S. stocks, foreign stocks, commodities, real estate, and bonds), however, didn’t experience a lost decade at all, realizing a respectable annualized gain of 7.2% per year. Other years, the shoe is on the other foot. Over the seven years following the Great Recession, stocks have exploded upward while a diversified basket of assets has had more tepid growth. But the recent underperformance of a diversified basket of assets does nothing to change the wisdom of diversification; a principle that has been around for millennia and will serve investors well for centuries to come.

Diversification does not assure a profit or protection against loss. The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.

Stress Contagion, the DOL and You

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Yawn.

YAWN.

Yaaaaaawwwwwwn.

Are you yawning after reading this? I’m fighting back the urge myself after writing the word three times—what gives? The answer to this extreme suggestibility lies with what scientists call mirror neurons—neurons that fire when an action is being performed and when that same action is being observed. The original discovery of mirror neurons took place in a sleepy, somewhat overlooked research lab in Parma, Italy. Scientists there were studying the brains of macaque monkeys in an effort to understand how the brain organizes motor behavior. As Martin Lindstrom explains, the scientists quickly discovered some things that challenged their assumptions about how the brain works:

“They observed that the macaques’ pre-motor neurons would light up not just when the monkeys reached for that nut, but also when they saw other monkeys reaching for a nut.” (Buyology)

Whether an action was performed by the monkey or merely observed, the effect on the brain was identical.

Stranger still was what they observed one sweltering afternoon when a graduate student on the team entered the lab with an ice cream cone. One of the monkeys, still hooked up to the monitoring apparatus, was staring greedily at the frosty treat. As the student brought the ice cream closer for a lick, the macaque’s pre-motor region began lighting up the screen:

“It hadn’t moved its arm or taken a lick of ice cream; it wasn’t even holding anything at all. But simply by observing the student bringing the ice cream cone to his mouth, the monkey’s brain had mentally imitated the very same gesture.” (Buyology)

shutterstock_153551429Mirror neurons are the reason why you cry in a sad movie, cringe at the sight of someone else eating something gross, or close your eyes when the chainsaw-wielding local stumbles upon the unsuspecting group of college kids at the lake house. Mirror neurons are why “unboxing” videos exist (seriously, it’s a thing), because it’s nearly as fun to watch someone else open a new gaming system or expensive toy as it is to do it ourselves. To truly apply this learning, give your children a video of other children opening presents at their next birthday party and tell them Dr. Crosby told you it’s more or less the same thing!

At this point you as a financial advisor may be thinking, “this all makes sense” and simultaneously wondering, “what does this have to do with me and my work?” It has been my anecdotal experience that just as married couples tend to resemble one another over time, the clients of financial advisors tend to behave much like the advisors with whom they work.

There may be some self-selection at work here but even more powerful are the cues that clients take from their advisors with each interaction. If your office has CNBC on loop and is stockpiled with magazines devoted to the hot stocks du jour, don’t be surprised when clients lead with griping about performance instead of sticking to their plan. Likewise, if you telegraph panic and are prone to complaining about politics and capital markets, don’t be surprised when your own fears land on your doorstop in the form of hand-wringing clients.

shutterstock_108406256The DOL’s “conflicts of interest” rule was announced yesterday, and with that will come the questions and uncertainty inherent in any new piece of legislation. Bearing in mind the concept of stress contagion, I would encourage you to consider the ways in which your clients will look to you as a leader and follow your example when sifting through their own feelings about this legislation in general and your value to them in specific. Change, it would seem, is coming, but one of the core beliefs of The Center for Outcomes is that periods of disruption provide opportunities for differentiation for the truly prepared. Whatever changes may come, your value to your clients and your position as a leader are steadfast and must be positioned as such.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Personal Benchmark was Made for Days Like This

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes

Chuck Widger and I released our New York Times bestselling book, Personal Benchmark: Integrating Behavioral Finance and Investment Management, on October 20, 2014. Although the book was published in 2014, the writing process began in 2013, and Chuck’s original idea for a goals-based investing system is much older still. Both 2013 and 2014 were great years to be invested, with the S&P 500 returning 32.39% and 13.69% respectively. But although Personal Benchmark was crafted in a time of prosperity it was created with an eye to days just like today.

What is needed during times of fear is an embedded solution that helps clients say “no” to short-termism and say “yes” to something bigger.

As we wrote in the book, “While investor awareness and education can be powerful, the very nature of stressful events is such that rational thinking and self-reliance are at their nadir when fear is at its peak.”

Financial advisors do their clients a great service by educating them about investing best practices, but at times of volatility, logic is often thrown out the window. What is needed during times of fear is an embedded solution that helps clients say “no” to short-termism and say “yes” to something bigger.

When presented with an extremely complicated decision, it is human nature to seek simplicity, something psychologists refer to as “answering an easier question.” Rather than deeply consider and weight the relative importance of social, economic and foreign policy positions, voters tasked with choosing a Presidential candidate tend to instead answer, “Do I like this person?” Confronted with a complex dynamic system like the stock market, the easier question that we ask ourselves is, “Am I going to be OK?” Part of the power of the Personal Benchmark solution is that it helps clients answer this important question in the affirmative.

bookOur book discusses the human tendency to engage in “mental accounting”, the psychological partitioning of money into buckets and the corresponding change in attitudes toward that money depending on how it is accounted for. Page 154 features the story of Marty, a Philadelphia-area gang member who separated his money into “good” and “bad” piles depending on whether it was honestly or ill-gotten. Marty would tithe to his local church using the good money, but reserved his bad money for reinvestment in his criminal pursuits. Although we are hopefully all more civic-minded than Marty, we are no less likely to label our money and spend, invest and think about it relative to that label. One huge advantage of Personal Benchmark the solution is that it sets aside a dedicated “Safety” bucket for days just like today. When a client asks herself, “Will I be OK?” she can take comfort from the fact that her advisor has accounted for her short-term needs. Being comforted in the here-and-now, she will be less likely to put long-term capital appreciation needs at risk.

“While investor awareness and education can be powerful, the very nature of stressful events is such that rational thinking and self-reliance are at their nadir when fear is at its peak.”

Besides helping clients say “no” to short-termism, Personal Benchmark also helps advisors paint a more vivid, personalized picture of return needs. Page 203 of Personal Benchmark tells the story of Sir Isaac Newton, who lost a fortune by investing in what we now refer to as the “South Sea Bubble.” Newton invested some money, profited handsomely and eventually sold his shares in the South Sea Company. However, some of his friends continued to profit from their investment in South Sea shares and Newton was unable to sit idly by and watch people less gifted than he accrue such fantastic wealth. Goaded on by jealousy, he piled back in at the top and lost almost everything, saying after the fact, “I can calculate the movement of the stars, but not the madness of men.” Newton’s failure is a direct result of anchoring his benchmark to keeping up with his friends instead of attending to his own needs and appetite for risk. If Personal Benchmark’s Safety bucket is for providing comfort today, then the Accumulation bucket is a vehicle for rich conversations about the dreams of tomorrow. As clients simultaneously manage their short-term fears and identify their long-term goals, they are able to experience the best of a goals-based solution.

Personal Benchmark was created in a time of comfort and even complacency on the part of some investors, but was done so with a perfect knowledge that there would be days like this. At Brinker Capital we believe that an advisor’s greatest value is providing “behavioral alpha”, increasing returns and mitigating risk through the provision of sound counsel. Our goal is to be your partner in that sometimes-difficult journey and Personal Benchmark is evidence of that commitment.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.