September 29, 2015

September 29th, 2015

Behavioral Finance!

When it comes to money and investing, we’re not always as rational as we think we are – which is why there’s a whole field of study that explains our sometimes-strange behavior. Where do you, as an investor, fit in? Insight into the theory and findings of behavioral finance may help you answer this question.

The emotion, fear, has been hard-wired into the human brain (specifically in the amygdala), due to its vital role in the survival. Researchers have found that fear is biological, not rational or reasoned. The human ability to control it is limited.

Recency Bias & Investing – We tend to use our recent experience as the baseline for what will happen in the future. But when it comes to investing and money it can cause problems.

When the market is down (as it has been over the past month), we become convinced that it will never climb out so we want to cash out our portfolios and stick the money in a mattress. We believe that the market isn’t going back up. But then one day it does, and we’re left sitting on a really expensive mattress that’s earning nothing.

Diversification to Reduce Risk

There is a tradeoff between risk and return. We can reduce investment risk by employing proper diversification within the investment portfolio, for example blending domestic and foreign stocks, bonds coupled with several alternative asset classes. Investing is a long term process, as such stay focused on the long term!

The Markets Last Week

Equities sank last week, as markets continue to be roiled by the Federal Reserve’s Sept. 17 decision to hold interest rates at zero, and the ensuing uncertainty about the timing of a rate rise.

The broad market fell 1.4%, with the selloff intensifying Friday, when biotech stocks tumbled sharply in the afternoon. There was no particular catalyst beyond the deterioration in sentiment and a desire by some investors to take down exposure to riskier assets, like small-caps and biotechs, traders say.

Affirmation of a hike this year by Fed Chair Janet Yellen—in a speech after the market closed Thursday—gave stocks a brief boost Friday, but the impetus petered out. Additionally, a strong earnings report from Nike (ticker: NKE), a component of the Dow Jones Industrial Average, pushed the Dow to a gain on Friday.

Last week, the Dow lost 0.4%, or 70 points, to 16,314.67, and the Standard & Poor’s 500 index fell 27, to 1931.34. The Nasdaq Composite dropped 3% to 4686.50.

The market is suffering from the aftershocks of the Fed’s decision, says David Lefkowitz, senior equity strategist at UBS Wealth Management Americas: “It’s still trying to digest what the Fed is trying to communicate.”

In her remarks, the Fed chair suggested overseas developments wouldn’t be important enough to have an impact on the decision to hike later this year, seemingly backpedaling from the Fed’s previous statement.

From week to week, the Fed’s message seems to be different, creating uncertainty, adds Rick Seto, a managing director at Flaherty & Crumrine. Investors need greater clarity to make fundamental investment decisions. “The only people making money now are day traders,” he adds.

“The U.S. is not a zero fed-funds-rate economy now,” says David Seaburg, head of sales trading at Cowen. Friday, the Commerce Department revised its estimate of second-quarter gross-domestic-product growth to 3.9% from 3.7%. The fed funds rate—the overnight lending rate banks charge one another for funds maintained at the Fed—is currently 0% to 0.25%.

“Rate liftoff would give confidence in the American economy. The Fed needs to move in December,” Seaburg says. (Source: Barron’s Online).

The Numbers

Returns through 9-25-2015 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years
Bonds- BarCap  Aggregate Index   -.2       .8    2.5     1.6     3.1     4.6
US Stocks-Standard & Poor’s 500 -1.3   -4.8     -.3   12.6   13.3     6.9
Foreign Stocks- MS EAFE Developed Countries -3.0   -4.5 -8.9     5.0    4.1     3.3
             

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends.

Motivational Quote of the Week

“Winning isn’t everything, but wanting to win is.”

Vince Lombardi

 


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