Rockbridge Named #81 on CNBC's Top 100 Fee Only Wealth Mgmt Firms List
Mar 08

Combating Investor Overconfidence

by Daniel Edinger

In my discussions with clients and prospects, one of the recurring themes is how, as their investment advisor, I can best provide advice contrary to their bias, intuition, or reaction to current business/economic  events.

An example is the current investor bias toward equities since the stock market has performed so well recently and bonds are feared because of the threat of increased inflation.

It is probably natural to hear that the asset allocation decision made just a short time ago is being questioned based on market psychology and the resulting impact on investment decision-making.

My role, as an investment advisor and fiduciary, is to challenge these tendencies and serve as a source of independent insight.

One client is a couple in their early 50s who have put two of three children through college.  They have a substantial joint income, no debt, but few investment assets.  We have established that they will require $2 million in investable assets to afford a comfortable retirement and they have less than one-third of that amount presently.  We have used an Aggressive Model for their investments with 70 percent invested in equities.   Investment panic has set in with the realization that full retirement in their early 60s is unlikely.  Their reaction is to move 100 percent into equities and is buoyed in that opinion by the recent stock market results.

As their investment advisor, I want to avoid simply confirming my clients’ bias in order to accommodate them.  They are overconfident in the stock market by extrapolating recent gains into overly rosy forecasts.  I find this behavior pattern is especially prevalent with people who have been successful in the business world.  It is similar to the thought that “I can beat the market” since I have made other correct decisions in my professional career.

Research has shown that individuals who report that they are “100% sure” of a particular fact are wrong 20% of the time.  I experience the phenomena with my barber, who never met a fact he could not mangle.  Overconfidence is the best known bias in making investment decisions.

Clients working with Rockbridge have two advantages.  First, we provide investment models that are not subject to current whims of the investment media.  Second, we provide independent advice and we see our role as providing an unbiased viewpoint.

You Might Also Like

Other articles filed under Investing

Market Commentary – October 2018

October 22, 2018
Stock Markets For the last quarter, stocks are up except for Emerging Markets, which were close to flat. Domestic stocks are seemingly shrugging off the uncertainties of increasing interest rates, trade wars and tariffs. Year to date, an Emerging Market...
Continue Reading

Is Your Cash Earning Interest?

October 16, 2018
Interest rates are rising, and yet you may not be earning much on your cash.  As financial markets finally begin to reflect a recovery from the crisis of 2008-09, the brokerage industry is changing the way they handle customers’ cash,...
Continue Reading

Understanding Bond Returns

October 12, 2018
We had several clients this year reach out to ask how bonds were performing in their portfolios. These are great questions, so we created a few items to address what you see in your statements.  Some people notice they have...
Continue Reading

New Tax Law Makes Bundling Gifts to Donor-Advised Funds Attractive

October 9, 2018
“Give, but give until it hurts.” - Mother Teresa -    I don’t think Mother Teresa paid much attention to the tax code, but her quote is unusually prescient for 2018 taxpayers.  The changes have made it unlikely to get...
Continue Reading

What to Ask Your Financial Advisor

September 20, 2018
How does/and how much does your advisor get paid? Fees matter.  It is important to know how much you are paying and the value you receive for that payment.  If you're paying 1% or more for only investment management with no...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter