The Disciplined Investor

Five Ways to Strategize Your Behavioral Biases

Your brain can be quite tricky with some 95% of its activity occurring subconsciously.[1] With every spontaneous signal, our cerebral synapses expose us to countless behavioral biases, duping us into making misguided money moves long before our rational resolve kicks in.

These biases can affect our investing behaviors and decisions. We may leap before we look, making choices based on emotions rather than rational planning.

Because many of our most powerful biases are based on reflexive rather than reflective thinking, it’s not enough just to be aware of them. We must also learn how to defend against them. Or better yet, turn behavioral biases to our advantage. How do you do that? By tricking your brain right back.

Biasing Toward Better Behaviors

To illustrate this principle, here’s one “trick” that has worked incredibly well for retirement plan participants.

When companies started offering 401(k) retirement saving plans in the 1980s, employees were traditionally invited to participate but were not automatically enrolled. In other words, you had to take deliberate action to get started and increase your contributions over time.

Today, you can still decide if and how much you’ll contribute to your company retirement plan. But instead of requiring you to opt into participating, many companies now auto-enroll you unless you deliberately opt out. Your employer also may automatically increase your contribution rate to the maximum allowable amount over time, unless you say no. By requiring action to avoid saving for retirement, you can trick yourself into saving more than if you had to take action to start saving. Thus, we recruit our tendency to favor inertia, using it to improve on, rather than detract from retirement plan participation.[2]

Continue reading

The Disciplined Investor

Your Portfolio Performance Compared to What?

Ah, we restless humans. Sometimes, it pays to strive for greener grass. But as an investor, second-guessing a well-planned portfolio can leave you in the weeds. Trading in reaction to the latest hot stocks or in response to fear tricks you into buying high (chasing popular trends) and selling low (fleeing misfortunes), while potentially incurring unnecessary taxes and transaction costs along the way.

Still, what do you do if it feels as if your investments have been underperforming? It helps to lead with this key question, to decide if the impression is real or perceived:

How am I doing so far … compared to what?

Compared to the Stocks "du Jour?" 

 It’s easy to be dazzled by popular stocks or sectors that have been earning magnitudes more than you have and wonder whether you should get in on the action.

You might get lucky and buy in ahead of the peaks, ride the surges while they last, and manage to jump out before the fads fade. Unfortunately, even experts cannot foresee the countless coincidences that can squash a high-flying holding or send a different one soaring. To succeed at this gambit, you must correctly—and repeatedly—decide when to get in, and when to get out … in markets where unpredictable hot hands can run anywhere from days to years.

Remember too, if you simply invest some of your money in the global stock market and sit tight, you’ll probably already own today’s hot holdings. You’ll also automatically hold some of the next big winners, before they surge (effectively buying low).

Rather than comparing your investments to the latest sprinters, be the tortoise, not the hare. Get in, stay in, and focus on your own finish line. It’s the only one that matters.

Continue reading

The Disciplined Investor

A Lesson on Long-Term Perspectives From Warren Buffett and Charlie Munger

In May, I was fortunate to attend the Berkshire Hathaway Annual Meeting recently with Dave Bromelkamp, Dave’s brother Mike Bromelkamp, and Derek Van Calligan. If you’d like to get a sense of the meeting’s atmosphere, check out Derek’s blog here: https://www.allodium.com/resources-2/allodium-blogs/the-responsible-investor.html.

The venue was full of excitement as the crowd anticipated soaking up the wisdom of Warren Buffett and Charlie Munger. The meeting format consisted of audience members asking the panel (including two other Berkshire Hathaway employees for the first half of the day) around 60 questions on topics ranging from why Berkshire Hathaway has invested in specific companies to their thoughts on estate planning. Many of the questions were regarding world events and current financial issues. The stories and perspectives shared by Warren and Charlie, each having nearly a century of life experience, were fascinating.

The recent bank failures came up early in the questions. Warren said, “The situation in banking is very similar to what it’s always been in banking…fear is contagious, always. As many as 2000 banks failed in one year after WWI…bank runs were just part of the picture.” 

Continue reading

The Disciplined Investor

Lump-Sum Investing vs. Dollar-Cost Averaging Round 2: What Makes Sense for You?

In my last piece, we explored how to invest available cash: Should you invest it all right away as a lump sum? Or are you better off wading in more gradually with dollar-cost averaging?

In round one, we discussed why lump-sum investing has historically expected to generate higher returns over time. In markets that have risen more, and more often than they’ve fallen, the sooner you deploy your investable assets, the more time they have to grow. That said, general rules don’t always apply to you. Let’s look at when dollar-cost averaging may be preferred after all.

Considering the Big Picture

First, it’s important to emphasize:

No matter which way you go (lump sum vs. dollar-cost averaging), it’s unlikely to matter nearly as much as whether you invest efficiently to begin with.

By this, we mean:

  1. Planning: Start with an investment plan that reflects your personal goals and risk tolerances.
  2. Investing: Invest according to your plan in a balanced mix of low-cost, globally diversified index or index-like funds.
  3. Staying the course: Sticking to your investments over time and through various conditions.

If you can do all that, exactly how and when you add new money is less significant. The best approach for you is the one that helps you best adhere to these sensible investment practices.

Continue reading

The Disciplined Investor

Lump-Sum Investing vs. Dollar-Cost Averaging Round 1: Raw Returns

Our investment consultants were excited to attend the recent 2021 Minnesota Financial Planning Association annual meeting. One of the highlights of this conference was hearing the financial outlook from a panel of economists. One interesting point made in the presentation was that national personal savings rates are near all-time highs. Of course, we have heard and seen this anecdotally from our clients. Part of the reason for this may be due from the pandemic. It’s hard to spend money if you can’t go out and eat at your favorite restaurant or make purchases because of supply chain issues.

With this extra cash on hand, one question we often hear is, “should I invest cash now with the market being so high?” We think this is a great question. While our long-term market outlook is positive, we wouldn’t be surprised to see market corrections along the way. Nobody enjoys seeing the market take a dive shortly after they jump in. Unfortunately, we never know when it might do exactly that.

What’s an investor to do? Should you go ahead and invest the entire amount right away? An alternative to investing the whole amount is investing gradually, such as in 12 monthly installments.

 In financial jargon, this is known as lump-sum investing (all at once) vs. dollar-cost averaging (over time). In more approachable terms, it’s often described as “plunging” vs. “wading” into the deep end of the market.

 Which one should you use? In terms of raw expected returns, the academic research suggests lump-sum investing is preferred. But sometimes, there are equally valid, if less tangible reasons to favor dollar-cost averaging. In this two-part series, we’ll explore both possibilities.

Continue reading

More Articles ...

  • 1
  • 2