My brain made me do it How to avoid six common investing mistakes

Transcription

1 Patrick L. McFawn CFP, CPA & Dale L. White CFP, CPA My brain made me do it How to avoid six common investing mistakes

2 Pop quiz Fill in the blank Buy Low High Sell Low High The fundamental principle of investing 2

3 The cost of emotional investing Net fund flows ($ millions) 140, , ,000 80,000 60,000 40,000 20, ,000-40,000-60,000-80, , , Q1 00 Large inflow at market peak 2001 S&P 500 Index Equity fund flows Q1 04 Large inflow after 2003 gains Q3 02 Large outflow at market bottom Q3 08 Large outflow at near bottom S&P 500 Index 1,600 1,500 1,400 1,300 1,200 1,100 1, Source: Strategic Insight and Bloomberg. The S&P 500 is an unmanaged index of 500 widely traded common stocks. It is not possible to invest directly in an index. Past performance is no guarantee of future results 3

4 Triune model of the brain Three brains in one Hominid Brain Higher: Reasoning and language Mammalian Brain Instinct: Feeling and emotions Reptilian Brain Survival: Breathing, heartbeat, etc. 4

5 How the brain works In a stressful situation, the brain shuts down flow to the Hominid center You really are stupider Takes hours to regain ability in the brain What happened in 2008? 5

6 Loss aversion Emotional tendency People s tendency to strongly prefer avoiding losses to acquiring gains The impact of a loss can be twice as powerful as the impact of a gain Anyone here gamble? Doubling down Leads to poor investment choices 2008, 2009, anyone? 6

7 Warning signs I can t sell now, it s down too far. It will come back eventually. I don t mind staying in cash the markets have been crazy lately! I d rather be safe. Sound familiar? 7

8 How to remedy loss aversion Don t just be prepared for market volatility expect it Involve impartial people Create a disciplined plan and stick to it! Develop an emergency fund Establish a dollar-cost averaging plan 1 ¹ Dollar-cost averaging does not assure a profit or protect against loss in a declining market. Such a plan involves continuous investment in securities regardless of fluctuating price levels. An investor should consider his/her financial ability to continue purchases through periods of low prices. Most investments generally fluctuate according to market conditions. Past performance is no guarantee of future results. 8

9 Anchoring Cognitive tendency Anchoring is your ability to concentrate and focus There is a common human tendency to rely too heavily, or anchor, on one trait or piece of information when making decisions 9

10 What are your anchors? S&P 500 Index Source: Lipper. 12/31/1972 to 6/30/1975. The S&P 500 Index is an unmanaged index that includes 500 widely traded stocks. It is not possible to invest directly in an index. Past performance is no guarantee of future results. The performance shown is not reflective of any John Hancock Fund. 10

11 What are your anchors? Thousands $600 S&P 500 Index $400 $200 $ Source: Lipper. January 1, 1970 December 31, The S&P 500 Index is an unmanaged index that includes 500 widely traded stocks. It is not possible to invest directly in an index. Past performance is no guarantee of future results. The performance shown is not reflective of any John Hancock Fund. 11

12 Warning signs I m still down 10%. I just want to get back to where I started. At one point I had $XXX, and now I have half that. Have you ever this? said 12

13 How to remedy anchoring Change your anchor Let progress toward your goals be your benchmark Seek out information to give you perspective 13

14 Status quo Cognitive tendency People tend not to change an established behavior unless the incentive to change is compelling It s easier to do nothing Creatures of routine Your initial portfolio allocation is tremendously important, as it has enduring impact 14

15 Procrastination Emotional tendency Positive bias toward the present Anxiety of starting a complex task People want to relax today and (invest, or anything) next week Fruit or chocolate? 15

16 Warning signs I have had that investment for years and it has been good. No need to change it now. I really should start saving for, but I will just start next week. What can you do about it? 16

17 How to remedy status quo & procrastination Make a schedule Revisit your plan at regular intervals Involve others and hold yourself accountable Learn what motivates you Reward yourself for progress toward goals 17

18 Barn door closing Emotional tendency Hindsight locking the barn door after the horse has run away Taking action after it s too late The mortgage meltdown, banks tightening credit Past performance is no guarantee of future results It s why people start to eat right and exercise after a health scare 18

19 Warning signs I don t care what happens next. I am moving to cash until things calm down. The market has done great this year. I knew I should have invested more. Next steps? 19

20 How to remedy hindsight Remember you did the best you could with the information you had Review your plan to make sure it still works for you Keep a long-term perspective Write a letter to yourself 20

21 One way to remedy hindsight My financial adviser and I have established a long-term plan. Some time in the future the market will correct to the point where I feel uncomfortable staying invested. I may feel scared and ask my adviser to get me out of the market. But, I know that my plan is sound and if anything, now may be a good time to invest more. My long-term goals haven t changed and I am committed to sticking to my long-term plan. 21

22 Availability Cognitive tendency People s tendency to use information on hand to make decisions The prevalence of media coverage reinforces availability Overestimating the probability of an event because it is associated with a previous memory 22

23 TIME Magazine War on terror Stagnant market Corporate fraud Mid-east violence Personal debt Housing bubble Social Security Federal deficit The new economy Weak U.S. dollar China emerges Gas prices Reprinted with permission from Time, Inc.,

24 Warning signs I see people with ipods everywhere. Apple must be a good stock to own. Everyone is saying now is the time to buy gold they must be right! Have you said something like this? 24

25 How to remedy availability Don t believe everything you hear! Remember, bad news sells newspapers Experts (and your neighbors and friends) can be wrong Systematic investing works in up and down markets 25

26 What have we learned? Your brain shuts down in times of extreme stress The brain is hardwired to become emotional at a time of crisis Remember the warning signs Have a plan in place A new mindset is needed to overcome human nature 26

27 Strategies to consider Write down your plan and refer back to it Establish what steps you will take in a crisis when you are not in a crisis Start dollar-cost averaging ¹ Expect that your portfolio will go down at times Involve others to hold yourself accountable including your financial adviser ¹ Dollar-cost averaging does not assure a profit or protect against loss in a declining market. Such a plan involves continuous investment in securities regardless of fluctuating price levels. An investor should consider his/her financial ability to continue purchases through periods of low prices. Most investments generally fluctuate according to market conditions. Past performance is no guarantee of future results. 27

28 Questions Past performance is no guarantee of future results. Performance, especially for short-term periods, should not be the sole factor in making investment decisions. A fund s investment objectives, risks, charges and expenses should be considered carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing or sending money. For additional prospectuses or for performance data current to the most recent month end, contact your financial professional, call John Hancock Funds at or visit our Web site at John Hancock Funds, LLC MEMBER FINRA SIPC 601 Congress Street, Boston, MA NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE. NOT INSURED BY ANY GOVERNMENT AGENCY. BEHSEM 6/10 28