We all hope for things, every day. We hope for good weather, we hope traffic flows smoothly, we hope our favorite contestant will be named the winner on the latest TV talent competition. Hope is a part of human nature – a feeling, an emotion we all experience.
But there are plenty of situations where hope just isn’t enough. Hope may be a lot of things, but it is not an investment strategy. Sure, we hope that our investments allow us to save for our children’s college education, or purchase that vacation home, or retire comfortably. In this case “hope” means that we want our investments and planning to pay off so that we can do all the things that we invest for.
Hope – and fear – can affect the way investors evaluate alternatives. When markets are up, and everything seems to be going our way, feeling hopeful is easy. Hope can lead investors to think optimistically about the future, to ask the question: How good can it get? According to Hersh Shefrin in his book Beyond Greed and Fear, an investor who says, “I’m hoping for…” may be willing to accept more risk to reach that goal.
On the opposite side of hope is fear. These two feelings have a way of affecting our ability to make rational investment decisions. So, that same investor who had been feeling hopeful may now feel fearful, saying, “I’m afraid of …,” and may be less likely to take on more risk. (Hersh Shefrin, Beyond Greed and Fear, 2002.)
How emotions influence decision-making forms the basis of behavioral finance, which seeks to explain why investors may make irrational financial decisions. One concept that can affect investors is “hindsight bias,” which often occurs in situations where a person believes, after the fact, that some past event was predictable and completely obvious. Of course, in reality, the event could not have been anticipated. But the way we feel today is likely the result of what we’ve experienced in the past, and this will influence how we feel about the future. In financial markets, as in many other areas of life, a number of events seem obvious in hindsight. We’ve all heard the old saying, “Hindsight is 20/20.” Psychologists believe that hindsight bias allows us to believe that events are predictable to find order in our world. (Albert Phung, Behavioral Finance: Key Concepts, Investopedia.com.)
Advisors provide value by understanding these behavioral tendencies and helping clients guard against them. The advisor advises, adjusting portfolio risk to meet investor needs, not based on their level of hope or fear
With MarketPlus Investing, we’re not “hoping” that a single stock will do better than the market, or “hoping” that an active fund manager will continue to outperform.
Instead, we’re using science and decades of research to guide us. (Dimensional Fund Advisors, Putting Financial Science to Work, February 2015.) MarketPlus investing is all about science and structure. We share the Nobel-prize winning investment philosophy of Eugene Fama of the University of Chicago, and other time-tested theories developed with his colleague, Kenneth French, of Dartmouth College.
MarketPlus Investing is based on four core fundamentals.
- Markets are efficient and priced fairly.
- Speculating is futile.
- Global stocks and bonds have rewarded investors over the long term. History has proven this, especially for those who have a strategy and stick with it.
- Portfolio design matters most.
Interestingly, not one of those fundamentals mentions “hope.” The financial industry has a way of selling hope, and playing on emotions. By relying on science and “controlling the controllables” to an extent, we can help put your mind at ease. A MarketPlus Investing portfolio is designed to best manage asset allocation, risk and tax implications for you – all while optimizing your expected return for the risk assumed. There are always factors we can’t control. But when we rely on what we know through science, we can reduce the anxiety felt when facing challenging markets, providing peace of mind without leaving things to “hope” or chance.
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