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

The “Don’ts” for Periods of Market Volatility

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

Having checked in this week with many of our advisors and the clients they serve, we know that this has been a stressful week for everyone involved in the market. On Monday, we wanted to provide a few proactive starting points and created a list of “do’s” for volatile markets. However, at times like this, knowing what not to do can be just as important as knowing what to do. With that, we present a list of things you should absolutely not be doing in periods of market volatility.

  • Don’t lose your sense of history – The average intrayear drawdown over the past 35 years has been just over 14%. The market ended the year higher on 27 of those 35 years. A relatively placid six years has lulled investors into a false reality, but nothing that we have experienced this year is out of the average by historical measures.
  • 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 a mere 27.6% of the time. Limited looking leads to increased feelings of security and improved decision-making.
  • Don’t forget how markets work – Do you know why stocks outperform other asset classes by about 5% on a volatility-adjusted basis? Because they can be scary at times, that’s why! Long term investors have been handsomely rewarded by equity markets, but those rewards come at the price of bravery during periods short-term uncertainty.
  • Don’t give in to 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” fame 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 accounts were those that had been forgotten entirely. In the immortal words of Jack Bogle, “don’t do something, just stand there!”

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Teaching Moments: Help Clients Shake the Emotional Hangovers

Sue BerginSue Bergin, President, S Bergin Communications

While the I-make-a-decision-and-forget-about-it approach might have worked for Harry S. Truman, it does not describe the vast majority of today’s investors.

According to our recent Brinker Barometer advisor survey[1], only 22% of advisors clients embrace Truman’s philosophy. The vast majority of clients suffer from emotional hangovers after periods of poor performance. They let the poor investment performance impact future decisions. Sometimes, it is for the better. In fact, 31% of clients made wiser decisions after learning from poor investment performance. Nearly half of the respondents, however, claimed that emotions cloud the investment decision following poor performance.

Bergin_LiveWithDecisions_7.30.14Another recent study, led by a London Business School, sheds light on how advisors can increase satisfaction by helping clients make peace with their decisions. According to the research, acts of closure can help prevent clients from ruminating over missed opportunities. To illustrate the point, researchers simply asked participants to choose a chocolate from a large selection. After the choice had been made, researchers put a transparent lid over the display for some participants but left the display open for others. Participants with the covered tray were more satisfied with their choices (6.30 vs. 4.78 on a 7 point scale) than people who did not have the selection covered after selecting their treat.

While the study was done with chocolate and not portfolio allocations, behavioral finance expert Dr. Daniel Crosby says that it can still provide useful insights on helping clients avoid what Vegas calls, “throwing good money after bad,” and psychology pundits refer to as the “sunk-cost fallacy.”

“Many clients are so averse to loss that they will follow a bad financial decision that resulted in a loss with one or more risky decisions aimed at recouping the money. If you detect that a client is letting emotional residue taint future decisions you should counsel them to consider the poor performance as a lesson learned. This will allow the client to grow from the experience rather than doubling the damage in a fit of excessive emotionality,” Crosby explains.

[1] Brinker Barometer survey, 1Q14. 275 respondents

The views expressed are those of Brinker Capital and are for informational purposes only.

Planning Fallacy

Dr. Daniel CrosbyDr. Daniel Crosby, President, IncBlot Behavioral Finance

Last November, my wife and I were blessed with the birth of Liam, our second child and first son. My wife, who had diligently prepared for all aspects of the baby’s arrival, had been encouraging me to prepare my overnight “go bag” in the case of an early arrival. As I am wont, I put this final preparation off until the last minute, only preparing a very few basic necessities and wrapping them unceremoniously in a Walmart bag rather than the leather duffel I use for most business travel.

Our son arrived without adverse incident (easy for me to say!) and as we hunkered down for those difficult, sleepless first nights in the hospital, I realized that my preparations had been inadequate. I had forgotten my contacts entirely, brought an outdated pair of prescription glasses and packed only enough clothing for one day following the delivery. Needless to say, the discomfort of those late nights in the hospital was only made worse by my lack of foresight. Not only was I sleepy, as is to be expected; I was also smelly, unshaven and outfitted in yesterday’s rumpled t-shirt. Luckily, the miracle of new life minimized my failure to prepare, but the (seemingly millions) of pictures will always tell the tale of just how unprepared I truly was.

Crosby_PlanningFallacy_4.3.14So how is it that I, an otherwise functional person who had been through this experience once before, was caught so off guard? The psychological term for what I had experienced is the 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. In my case, the damage was limited to a few unfortunate pictures, but 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. To use my example, I was hoping to be in the hospital just two nights instead of the five we spent when my daughter was born. By packing a small bag, I was willing this dream into existence. A second supposition is that we are overly-optimistic judges of our own performance. Extending this line of thought, I might understand that most couples are in the hospital for three nights but most couples are not as fit, intelligent and strong-willed as the two of us (to say nothing of our exceptional progeny!). 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. Sure, it may just take a few hours to have the baby, but there is recovery, eating, entertaining visitors, and the requisite oohing and aahing over the new arrival.

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, most Americans have less than $25,000 in retirement savings. 43% of Americans are just 90 days away from poverty and 48% of those with workplace retirement savings plans fail to contribute. 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. But wishing it won’t make it so any more than wishing for my son’s hasty arrival did. I got off no worse than a few bad pictures and some unsightly hair; those who plan to save for their financial tomorrow’s won’t be nearly as lucky.

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Behavioral Finance 101: Framing

DanielCrosbyDr. Daniel Crosby, Ph.D., IncBlot Behavioral Finance

As we’ve discussed in the first two parts of this series, economic decision makers are not the cold, detached, decision makers they have historically been painted to be by efficient market theorists. Quite the opposite, human behavior is marked by irrationalities and fuzzy logic based more closely on mental approximations than hard and fast rules. We have already touched upon the impact of heuristics and irrational behavior and today will turn our gaze to the third pillar of behavioral finance – framing.

7.10.13_Crosby_Framing_2Simply put, framing is an example of a cognitive bias in which people arrive at a different decision depending on how the question is framed. While homo economicus would weigh all decisions equally and disregard framing effects, actual behaviors indicate that the lens through which we view a decision has everything to do with the eventual outcome. Frames can take a number of shapes; it could be the physical place where we make a decision, whether a question is positively or negatively framed, and even the way we mentally account for the options from which we are selecting.

Consider a real-life framing example with a huge cost to the U.S. taxpayer. Twice in the past few years, the government has tried to stimulate the economy by offering tax rebates to the hardworking citizens of the U. S. of A. Both times, these efforts have met disappointing ends, and behavioral finance may just be able to tell us why.

Belsky and Gilovich lead us toward the answer in their excellent primer, “Why Smart People Make Big Money Mistakes.” They describe a study conducted at Harvard wherein 24 students were given $25 to spend in a lab store as part of their participation in a research. Any unspent money, they were told, would be returned to them shortly via check. But wait, there’s a rub (there always is when psychologists are involved)! Half of the students were told that the $25 was a “rebate” and the other half told that it was a “bonus.” Could such a minute difference in cognitive framing have a measurable impact on spending behavior? It turns out, it could.

7.10.13_Crosby_Framing_1For those whose earnings were framed as a bonus, 84% spent some money in the lab store, a behavior mimicked by only 21% of those whose money was framed as a “rebate.” Now consider the decision of the U.S. government to give “tax rebates” to help stimulate the economy—an action that ultimately failed, probably at least in part due to framing effects. Irrational decision makers that we are, we fail to grasp the fungible nature of dollars and account for them differently based upon how they are framed in our mind. As Nick Epley, the psychologist who conducted the Harvard study, said more forcibly, “Reimbursements send people on trips to the bank. Bonuses send people on trips to the Bahamas.”

One of the most profound forms of framing effect plays on our fear of loss in times of fear or risk, or the related fear of missing out in times of plenty. This tendency, demonstrated most powerfully by Daniel Kahneman and Amos Tversky is known as “loss aversion.”[1] The basic tenet of loss aversion is that people are more upset a loss than they are excited by an equivalent gain. Consider the comical demonstration of loss aversion that resulted from a survey conducted by Thomas Gilovich. Mr. Gilovich asked half of the respondents to a questionnaire whether or not they could save 20% of their income, to which only half said yes. The second half of the respondents was asked whether they could live on 80% of their income, to which 80% replied in the affirmative. To-may-to, to-mah-to, right? So why are the responses so different?

7.10.13_Crosby_Framing_3The first phrasing frames it as a 20% loss of spending power (there is a large body of research that indicates that saving is viewed as a loss. Silly people), whereas the second frames it more positively. Thus, equivalent financial realities are viewed through entirely different lenses that lead to decisions with profoundly different outcomes.

One of the benefits of behavioral finance is that it shines a light on the little peccadilloes that make us the flawed but lovable people we are. But irrational as we may be, we can turn the tide on ourselves and use these quirks to our personal advantage. Framing is only disadvantageous inasmuch as the frames we are applying to our money are reckless. Viewing money through the frame of a charitable contribution or a child’s college fund can impact your financial decision positively just as surely as framing it as disposable can have a negative impact. At Brinker Capital, our Personal Benchmark system accounts for the human tendency to mentally account for and frame dollars, and does so in a way that helps ensure an appropriate allocation of assets across a risk spectrum. As we hope you’re aware after taking part in this behavioral finance survey course, you are not as logical and dispassionate as you might have guessed. Whether or not you use that irrationality to your benefit or detriment is now up to you.


[1] Kahneman, D. and Tversky, A. (1984). “Choices, Values, and Frames”. American Psychologist 39 (4): 341–350.

Behavioral Finance 101: Heuristics

DanielCrosbyDr. Daniel Crosby, Ph.D., IncBlot Behavioral Finance

While the field of behavioral finance has been around for 40 or so years (depending on who you ask), it truly came into its own in 2002 when Daniel Kahneman received the Nobel Memorial Prize in Economics for his work around uncertainty and decision-making. Although he claims never to have taken an economics class, Kahneman’s work shed new light on the ways in which actual people behave under real-life circumstances, as opposed to the idealized assumptions of efficient market hypothesis, the theretofore ascendant paradigm for understanding investment outcomes.

While one of the nagging critiques of behavioral finance is that it has no mutually-agreed-upon philosophical framework, most psychologists divide it into three pillars: heuristics, irrational behavior and framing. Over the next few weeks, we’ll take each of those three pillars and try and understand them a little more deeply. In so doing, we’ll also tackle the “so what” of behavioral finance for the average investor. Without any further adieu I give you Part One of our survey course on behavioral finance – Heuristics.

I’m not sure what time of day you’re reading this, but whenever it is I can be sure of one thing: you’ve already made a lot of decisions today. First of all, there was whether or not to hit the snooze button. Then, what to have for breakfast? Luffa with body wash or bar soap in the shower? Grey suit or navy suit? And so on and so forth. The point is, given the myriad decisions we all face every day, it’s no wonder that we end up relying on heuristics or experiential rules of thumb, when making even important decisions. To give you a little firsthand experience with heuristics, I’d like to ask you to do the following:

5.9.13_Crosby_BeFiBlog_1Quick! Name all the words you can that begin with the letter “K.” Go on, I’m not listening. (Insert Jeopardy theme song here). How many were you able to come up with? Now, name all of the words you can in which K is the third letter. How many could you name this time?

If you are like most people, you found it easier to generate a list of words that begin with K; the words probably came to you more quickly and were more plentiful in number. But, did you know that there are three times as many words in which K is the third letter than there are that start with K? If that’s the case, why is it so much easier to create a list of words that start with K?

5.9.13_Crosby_BeFiBlog_1_pic3It turns out that our mind’s retrieval process is far from perfect, and a number of biases play into our ability to retrieve data with which we’ll make a decision. Psychologists call this fallibility in your memory retrieval mechanism the “availability heuristic,” which simply means that we predict the likelihood of an event based on things we can easily call to mind. Unfortunately for us, the imperfections of the availability heuristic are hard at work as we attempt to gauge the riskiness of different decisions, including how to allocate our assets.

In addition to having a memory better suited to recall things at the beginning and the end of a list, we are also better able to envision things that are scary. I know this first hand. Roughly six years ago, I moved to the North Shore of Hawaii along with my wife for a six-month internship. Although our lodging was humble, we were thrilled to be together in paradise and eager to immerse ourselves in the local culture and all the natural beauty it had to offer. That is, until I watched “Shark Week.”

5.9.13_Crosby_BeFiBlog_1_pic5For the uninitiated, “Shark Week” is the Discovery Channel’s seven-day documentary programming binge featuring all things finned and scary. A typical program begins by detailing sharks’ predatory powers, refined over eons of evolution, as they are brought to bear on the lives of some unlucky surfers. As the show nears its end, the narrator typically makes the requisite plea for appreciating these noble beasts, a message that has inevitably been over-ridden by the previous 60 minutes of fear mongering.

For one week straight, I sat transfixed by the accounts of one-legged surfers undeterred by their ill fortune (“Gotta get back on the board, dude”) and waders who had narrowly escaped with their lives. Heretofore an excellent swimmer and ocean lover, I resolved at the end of that week that I would not set foot in Hawaiian waters. And indeed I did not. So traumatized was I by the availability of bad news that I found myself unable to muster the courage to snorkel, dive or do any of the other activities I had so looked forward to just a week ago.

In reality, the chance of a shark attacking me was virtually nonexistent. The odds of me getting away with murder (about 1 in 2), being made a Saint (about 1 in 20 million) and having my pajamas catch fire (about 1 in 30 million), were all exponentially greater than me being bitten by a shark (about 1 in 300 million). My perception of risk was warped wildly by my choice to watch a program that played on human fear for ratings and my actions played out accordingly. This, my friends, is heuristic decision making hard at work.

Hopefully by now the application to investment decision-making is becoming apparent. For so long, we have been sold an economic model that posited that we had perfect, uniform access to information and made decisions that weighed that information objectively. In reality, our storage and retrieval processes are imperfect, with recent and emotionally charged pieces of data looming larger than the rest.

5.9.13_Crosby_BeFiBlog_1_pic4Investors and financial services professionals that understand these imperfections are better positioned to understand the limitations of their knowledge and try to intervene accordingly. At times this may mean taking a more tentative position to circumvent undue risk. Other times this may mean digging a little deeper on what may initially appear to be a foolproof trade. Whatever the case, it is only after we free ourselves from the myth of homo-economicus, that we are able truly become our best investing selves. Making decisions based on subjective logic needn’t be your undoing as an investor, but assuming that you’re a perfectly logical decision maker just might.

You: The Key to Better Investment Returns…and More

Sue BerginSue Bergin

John Hancock’s recent Investor Sentiment Survey demonstrates that over half of investors who use an advisor are confident (56%) that doing so will lead to better investment returns.[1]

How’s that for a confidence boost?

The study also gives us tremendous insights into why clients choose to work with financial advisors and highlights the importance of three factors:

  1. Realistic assessment of one’s own investment management capabilities
  2. Confidence in advisors’ ability to generate better returns than the individual could do themselves and add value to the process
  3. Time constraints

A significant number of participants who work with advisors (47%) do so to obtain a comprehensive financial plan and for validation that their financial decisions are on track.   They tend a need to have a professional’s stamp of approval on their decisions.  This is a moderate showing of confidence in his or her own ability and reveals a willingness to seek and listen to advice.

You Are The Key37% of those working with advisors claim to do so because they lack the knowledge to manage their own investments.  43% of the respondents who do not have an advisor chose to go at it alone because they feel like they can manage comfortably on their own.

36% of the “do-it-yourself” group said that they did not think advisors provided good value for their money.

Working with An Advisor

No Advisor

56% believe working with an advisor will lead to better investment returns 43% have confidence in their own abilities and therefore do not need to work with an advisor
47% seek comprehensive financial planning advice and to validate financial decisions 40% actually enjoy the process
36% acknowledge they couldn’t manage investments on their own 36% lack confidence in advisors
24% don’t have the time

Few people think they could perform surgery on their own knee, but many investors believe they could get comparable results without a professional’s assistance. Technological innovations are only going to fuel that sentiment by making it easier and more fun than ever for the do-it-yourselfers.  The key for advisors is to focus on your unique qualification and the value you add to the relationship.

Instill confidence in your abilities, so theirs are never even considered.


[1] John Hancock Investor Sentiment Survey, January 7, 2013

Impatience and Sadness: Two Costly Emotions

Sue BerginSue Bergin

If you had to name the top three emotions that cause people to make bad financial decisions, you’d probably say anger, guilt and fear.  While these are true, there are two more emotions to add to the list—sadness and impatience.

Psychological scientists from Harvard Kennedy School of Government and Columbia University recently published a report on November 13 that show a correlation between sadness, impatience, and poor financial decision-making.

The researchers asked participants questions with both short- and long-term financial implications.  Before answering, however, half of the participants had to watch a sad video.

sadness

The study found that these two emotions could be quite costly.

Participants subject to “sadness conditions” earned significantly less money than the participants who did not view the video.  They valued future rewards on average 13% to 34% less than their “neutral state” counterparts.

The researchers concluded that sadness triggered impatience – another emotion that produces poor financial results. When sad, people craved immediate gratification.  Sadness triggers impatience; impatience causes people to forgo future gains in exchange for instant gratification.