Yohance Harrison
Appearances
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
And when it sold and I saw and I didn't see it to after the fact because I let the robo do its thing and it sold and I said, oh, my goodness, I can't believe I sold that stock. It just hit an all time high in the news. They're talking about it doing a split. Last time we did a split, it went up by 200 percent. Why did I sell it? And then I remembered that I paid three times less for it.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
I sold it because I made money and my algorithm said, you're overweighted in this now, so we're going to sell.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
But it was a little painful too. And it was one of those companies where I'm frustrated because they keep raising the price of the service. But meanwhile, the stock price is going up. So I'm like, why am I complaining here?
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
The only way to make money is to eventually sell. It's not really made until you sell and it's turned into cash that then you can use to purchase something else or for your lifestyle or what have you. Until then, the gains are, as I say, just on paper.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
I'd love to, Sean. Let's start the stage with something in behavioral finance we like to call cognitive dissonance. which is when you have two conflicting beliefs that live in your brain at the same time. For example, have you ever been excited about a stock to go up while at the same time complaining about the prices of the products or services of the company that makes it?
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Yeah, that's a good one. That's exactly what's happening in our brain and that leads to what we refer to as anchoring and recency biases. They are primary contributors to us having this conflict in our mind. And they lead to a chicken or egg sort of paradox where one can lead to the other and the other can then lead right back to the same one. So let's start with anchoring.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Anchoring is when the first number you see influences your decision, even when it shouldn't. So imagine if you're driving through a neighborhood and you see a new development of houses and the sign says new home starting at seven hundred thousand dollars. A few months later, you decide to take a look at one of the homes, and the builder says there's a special on that home for $650,000.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
All of a sudden, you'll start to feel like you're getting a deal.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Exactly. And investors do this with stocks all the time. Sometimes someone will buy a stock after their friend tells them how much money they made and then the price drops and then the new investor refuses to sell because they're anchored to that original price instead of the stock's actual value.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
I see the anchoring effect can cause a bit of buyer's remorse. Following the COVID-19 epidemic, the S&P 500 rallied double digits for 2020 and 2021, and investors just piled into equities. However, 2022 brought a double digit drop in the S&P's value, and many investors weren't prepared for this level of volatility.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Now we have to think about how can we fight anchoring because it's hard to ignore the first number that we see. And the key is zooming out. Instead of focusing on the prices, ask yourself, what's the value today based on real fundamentals? And the same thing goes with real estate, shopping, anything. Don't get hypnotized by the first number.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Look at the big picture and consider the purpose of the investment. And when I say purpose, what goal are you actually investing for?
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Recency bias is when we assume that what is happening is going to happen forever. So when the market's going up, we think that the market will keep going up. And when it's going down, we feel like it's going to go down forever. And like I said, it's one of those chicken and egg sort of syndromes where the first bias that we have with anchoring can then lead to the recency bias.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Like I mentioned earlier, with the democratization of investing that happened during the pandemic, lots of new investors were entering the market and the market was rallying. As those investors got into the stock market, especially those that got in later in 2021, they thought the market only goes up. And the same was even true for cryptocurrencies during the same timeframe.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Then in 2022, when prices were going down, those same investors panicked and newer investors thought that the market only went down. The same thing happened in the 08, 09 recession, going back to the dot-com bubble in the early 2000s. We're constantly focused on what happened and think that's always going to happen instead of, again, pulling back and looking at the big picture.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Looking at the big picture is recognizing that the market goes through cycles. They go up and down. It's volatility is the price we pay for the returns in the stock market. So you want to look again at the long term of what are you investing for? So if you're a brand new investor and let's say you're starting your 401k or some sort of IRA, think about when you expect to use that money.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
and allow that information to guide your investment decisions. Also, don't get emotional about what's happening in the market. Again, it's going to go up, it's going to go down, that's part of investing. And know that once about every two years, the market's going to have a 10% decline. That's just normal.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
That can also present a great time to start investing, especially if your outlook is long-term. The longer you hold those investments, the greater the likelihood that you're going to have positive returns.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Exactly. And again, detach your emotions from it. There's an old saying that investing is not supposed to be exciting. It's supposed to be like watching paint dry. Nothing happening here. Just put your money in. Think for the long term. Don't allow your emotions to change your involvement in how you're going to invest. In other words, I'm going to say it really simply. Have a plan.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Stick to that plan and just keep moving forward.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
That's true. And remember, if you're going to treat it as a game, the game is to win. Not today, not tomorrow, but as you stated earlier, at least five years from now.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
So if you can keep that long-term outlook and stay in the game, similar to how I taught my son to play Monopoly, the goal is to stay in the game longer than everyone else, rather than blowing all of his money the first time he goes around the board and then he can't stay in. So staying in the game is the game.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
It's not so much the lack of understanding how it works, because like you said, a lot of people understand or have heard that the stock markets can return positive returns close to the area of 10% over time. It's our emotions that get in the way. If you go into investing, with the thought, okay, the stock market gets a 10% return.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
And then like in 2022, you lost 20% of your money in the first year. So that emotion, that feeling of, oh, why did I do this? This was a bad decision I'm losing. And that's where the recency bias starts to creep in. It's going down. It's always going to go down. It's never going to go back up. removing that emotion and saying, no, this is a part of it.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
My way to 10% is accepting this negative 20% and continuing to stay invested and continuing to invest and remembering things like some of the greatest investors of all time have taught us when other people are being fearful is a great time to be greedy. And when other people are being greedy is a great time to be fearful a la Warren Buffett.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
One of the best things you can do to help counter these biases is learn what they are. And the number one way that every professional on this top is going to tell you is to have a well-defined plan and sticking to that plan in light of all of the information that will be coming to you.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Another thing to do is sometimes you just have to turn the TV off and get rid of the noise because the noise can distract us. The noise may not be the television, maybe coming on our phones, coming in social media, it's coming from friends. But that noise gets in the way of what your long term goals are and sticking to that plan over time.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
The last thing I'll say is that we're all familiar with the phrase of when we're encountered by fear that we may want to go into what's known as fight or flight syndrome. And there's actually some new data that's come out about the fight or flight response. And there's another response that we also need to pay attention to, which is just doing nothing. Phrasing. We don't have to fight the bear.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
We don't have to run from the bear. Actually, if we're just really, really still, maybe the bear will just go on about its way. Think about that when it comes to a bear market, when it comes to bull markets. We don't have to fight them. We don't have to run from them. Sometimes the best thing to do is just to stay the course and not do anything different.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
So recognizing that those emotions are real and asking yourself the question, am I about to make this decision based on my emotions or am I making decisions based on facts and fundamentals? And if you're leading back to the emotions, you're probably not making the best financial decision.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Absolutely. And actually, a good friend of mine, Dr. Daniel Crosby, I may be paraphrasing this a bit, but he said one of the greatest risks that we can take is not taking risk at all. So these money fears that we have, fear of losing, fear of getting it wrong, fear of messing up, can actually stall us from getting started.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
If you look back, there's lots of data on this on how investors reacted after the financial crisis of 2008 and 2009. And during that time period, many investors sat on the sidelines in fear of investing and missed out on one of the greatest bull markets that we have ever seen in the stock markets, especially here in the United States.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
So again, that fear of not being able to be in control of what's happening can cause some inaction. And the best thing to do is maybe talk to a professional. Find someone that is a financial advisor or behavioral financial advisor that can talk to you about your goals, talk to you about your feelings, and then educate you and help you put together a plan to get you back on track.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Here's what we have to remember about algorithms is that they were built by a person. So someone wrote that code. And another friend of mine, Ted Truscott, he said to me one day about algorithms is that they all work until they don't. What he meant is that the algorithms, they don't have recency bias, but they also with that recency bias comes new information.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
The algorithms did not understand the COVID-19 breakdown of 2020. The algorithms didn't quite understand when there was other things that were happening in the world and in the economy that were directly affecting the stocks that day.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
And sometimes the algorithms can cause excessive trading that will happen where, in some cases, the people that run the stock market will shut things down and say, no, we got to stop this.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
However, those same robo advisors and algorithms can also help you from getting into trouble with allowing your emotions and thoughts to get in the way of the fundamentals of what's happening with the underlying stocks and investments that you're working with.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
And quite frankly, 80% of the money that I manage for clients is on some sort of robo advisor type platform, meaning I've set barometers of where I want to buy and sell certain securities.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
When it goes outside of that barometer, either I get an alert or for some accounts, depending on how they're invested, it may automatically trade so that I don't have to think or allow my emotions to get in the way of the long-term plan for that portfolio.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
You're absolutely correct. And I have to come in as a human every now and then and make certain tweaks to that algorithm because perhaps my client's lifestyle has changed. Perhaps their goals have changed. Perhaps their job has changed. Perhaps tax rates have changed. So those changes do require us as humans to go and make some tweaks to those algorithms and robo advisors.
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Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
But for the most case, they're a great place to start for someone that's just getting started, looking to get into investing. A robo portfolio or some sort of self-managed portfolio can often be better than trying to pick the hot stock of the day.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
So I have a very recent recency bias situation. It also involves a little bit of anchoring because, again, it's they kind of lead to each other. I recently had a stock that was sold out of my portfolio because of my robo advisor that I had in my own personal portfolio.