With the pain of loss from the market’s downturn still vibrating in their bones, individual investors are too wary of a repeat performance to return to equities even though the market has regained lost territory and there is money to be made. Behavioral economics has the reasons why, says Franklin Templeton, and a new brochure from the firm provides investors with an introduction to understanding their own behavior.
In its brochure 2020 Vision: Time to Take Stock, the company offers information to investors on how their emotions affect their investing behavior, so that they can better understand their own decisions and focus better on their long-term goals rather than their experiences.
“Many individual investors are still looking at equities through bear-market glasses, so to speak,” said David McSpadden, senior vice president of Global Advisory Services, in a statement.
He continued, “The markets took investors on a roller coaster ride. Everyone remembers the dramatic drop. But investors have paid less attention to the steady climb back up. They have sought traditionally ‘safe’ investments. Unfortunately, with interest rates at historic lows, many of those strategies offer marginal or negative real return, causing investors to fall short of their long-term goals.”
Investors who understand why they behave as they do and what affects their decisions can make better decisions and recognize the influence of nonfinancial factors on their actions.
To this end, the brochure examines some of the human behaviors that impact investment decisions; facts investors may be unaware of with regard to more recent positive market developments around the world; and strategies to help investors reposition their portfolios with an appropriate allocation to equities and fixed income.
Among the behavioral phenomena addressed in the brochure are availability bias, loss aversion and herding.
Availability bias is explained as the influence on decisionmaking by experiences that are personally the most relevant, recent or dramatic. In the case of investors, it can take the form of a far heavier hand of influence by the financial crisis in 2008 than for any ground regained in the markets in 2009, 2010 and 2011.
Loss aversion means that investors suffer far more from losing money than they are buoyed by seeing their assets rise. As a result, many have fled equities to take shelter in money markets and CDs, regardless of the low returns these products currently provide.
Herding means that investors tend to take whatever action the crowd is taking. As a result, they can end up following the crowd over the cliff if they buy high and sell low or simply sit things out as the market rises.
McSpadden added, “We encourage investors to refocus on their long-term goals, and work with their financial advisors to take a critical look at how emotional concerns might unintentionally be influencing their investment decisions. It’s so important to objectively assess how portfolios need to be positioned to meet future goals.”