Choosing an Asset Allocation Behavioral Aspects

Basic asset allocation is how much of your income/savings is invested in the stock market, bonds, and cash. Much has been written about selecting an asset allocation, and there are several questionnaires available to new investors to assist with deciding on how much stock to hold. But there are three major considerations that aren’t included … Read more

Understanding Stock Volatility

Portfolio Losses and Volatility

Vix
Volatility Index (VIX)

Volatility, the constant change in a stock fund or portfolio value, is normal and cannot be avoided. None the less, it scares people, or to be more accurate, downside volatility scares people, while upside volatility makes them happy. Both of these emotions can cause problems for investors.

Upside volatility, the bright side, may give investors overconfidence and make them feel like they are in control and smart. This can lead to a poor decision of increasing risk. Portfolio losses, the dark side, may cause investors to sell and lock in the loss. Furthermore, people are risk averse, and losses create twice as much pain as increases create satisfaction. Investors emotions wax and wain with volatility when they should be focused on long term.

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Heads-Up New Indexers

First, welcome to Barry Barnitz’s new investing blog, Financial Page.

Changing Styles-WSJ chart
– Investors Pour Into Vanguard, Eschewing Stock Pickers, Wall Street Journal, August 20, 2014

If you are a new investor in index funds, here is some information to think about.
Inflows into mutual funds, and particularly index funds, has been very strong over the past three years.
 

Performance chasing

Fund flows are driven by investor behavior, and this particular behavior is the dogged tendency of investors to move in and out of stocks with market returns, thus creating the flow. The behavior is referred to as performance chasing. And it’s not just by year, it even happens on a weekly basis.

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The thin green line

 
thingreenline
The thin green line

The thin green line is the elusive line you must cross to get your fair share of stock market returns. What’s fair share, you ask?
Your fair share is the average returns provided by the stock market.
You might think it shouldn’t be difficult to get average,  but accounting for costs and behavioral mistakes, it is really very difficult. After 20 years investing, more than 80% of investors won’t cross the thin green line. and without an extraordinary gift from John Bogle, you would not even have the chance to get your fair share.

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Perspectives on Investing – Fourth article in the Perspectives series.

What we have tried to do in this short series of articles is present the most basic attributes that make an investor an efficient investor, and we’ve done that by looking at investing basics from a slightly different view-point—one that emphasizes attitude and behavior.


We have done this because the average investor does not get the returns of the funds he or she is in, and that includes those who use index funds. The goal is clear then, we must behave in an efficient manner to capture what is available to us. A big part of doing that is setting sights on the proper target, and that target is your fair share, not market-beating returns.

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Perceptions On Investing – Risk, 3rd in the Series

In the first two articles of this series we focused on attitude and behavior. Investor behavior has far-reaching influence and maybe no where is it more clear than in dealing with your own chosen asset allocation.

How do we define risk in terms of retirement?

There are many definitions of risk depending on what particular aspect of investing is being discussed. In this article we will focus on the main subject area, risk associated with retirement funding. Note that the number and length of discussions on risk on the Boglehead forum are legion. In other words, investors have strong beliefs in what they view as risk, and views vary according to personal feelings, personal circumstances, and even genetics.

There are two basic risks associated with retirement funding:

  1. The risk of not having enough to reach your needed retirement goal, and
  2. Risk of not having enough for retirement due to taking too much risk at the wrong time.

There are some investors who are risk averse from the start and hesitate to use any equity, and there are investors who become risk averse after encountering their first market crash. On the other hand, there are investors who have no fear of substantial losses at all. These investors believe that any and all market crashes will recover in a reasonable time period. Sitting at either end of the range is probably not prudent, but you can review the following and decide for yourself.

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Perspectives on Investing — Behavioral pitfalls are the No. 1 reason for return slippage.

focused on the importance of having the right attitude and having reachable expectations. In this article, we look at some specific behavioral errors that cause investors to end up with substantially less in their portfolio due to self-imposed return slippage. Slippage has also been coined “the behavioral gap” by Carl Richards. Behavioral errors The individual … Read more

Perspectives on Investing – First in a series of articles on investing basics

What makes the average person a better than average investor? The answer is doing just a few things right.

Expectations

The first thing you need to realize is you cannot know everything you need to know to consistently outsmart the market. No one does. The key for average investors is doing what we can do as efficiently as possible. In other words, maximize returns by eliminating the slippage produced by mistakes.
Alice-in-Wonderland-rabbitThis quote from Alice in Wonderland is appropriate for the majority of investors:
“The hurrier I go, the behinder I get.”
The remarkable result of not being in a great hurry to build wealth is you will end up with better than average returns in the long term.

 

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