As an investment portfolio manager, the most difficult challenge we face is not the investments themselves or constructing a successful portfolio for an individual or family. No, the single most difficult challenge is helping to protect these same individuals and families from making emotional decisions that could destroy their financial future.
We believe investing is Black & White. The only grey area is your emotions. We all fall prey to human emotions because it is inherent in each of us.
Managing these emotions and expectations is a delicate balancing act, but it is the foundation of a successful investment plan. It is important to identify the unique combination of Emotional Biases each person faces so we may educate against or accommodate for them appropriately.
Some common emotional bias we experience can include:
Endowment Bias: believing the value of what I own is worth more than the same object that is unowned.
Loss Aversion Bias: the tendency to prefer to avoid losses vs acquiring equivalent gains. i.e. $10 up is not the same as $10 down.
Overconfidence Bias: the thought of having superior ability to make a decision or access to information.
Self-Control Bias: the inability to pursue long-term goals because of lack of self-discipline in the short-term.
Status Quo: preference for the current state of affairs to remain and any deviation from such is perceived as a loss
At the end of the tech bubble, we drew a line in the sand. A tried and true “balancing act” would be the only way we would manage a portfolio—no more helping people chase returns, jumping in and out of stocks, sectors, or the market itself. We developed a process to build and actively manage a portfolio to obtain and maintain this balance. And…we put disciplines in place to follow it.
It is safe to say that after twenty years, experience has taught us to be comfortable with our disciplines. Our goal is to help you say the same in your future and help you live Life on purpose!
