Investor Behavior

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Compartmentalize Your Finances

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 Love Starbucks? A lot of us do, but try answering this question I recently heard posed by a behavioral finance professor:  “Would you be more inclined to order a latte that was advertised as 95% fat free, or one labeled 5% fat?”  The two $5 drinks are the exact same, however, I would venture to say 99.9% of people (including me) would choose the drink that was advertised as 95% fat free.  Perception is as powerful force in the coffee world as it is in the investment world. Perception can work against you when it comes to savings or it can fuel you. Much of that depends on how you compartmentalize.

The Behavioral Finance of Compartmentalizing

So what does it mean to compartmentalize?  Simply put it is separating two or more things from each other.  In personal finance, separating certain accounts to have individual goals can have a tremendous effect on the likelihood of savings and overall success of the individual’s financial plan.  For instance, one of the most important pieces of a financial plan is maintaining an adequate emergency fund for the dreaded unknowns – such as job loss, unexpected home improvements, medical expenses, etc. (The Center team usually recommends that clients maintain 3 – 12 months of living expenses in a cash account that is not subject to market risk). 

Establish Separate Accounts

If you find yourself constantly transferring funds from your savings to your checking account each month because they are at the same institution and the ease of the transfer is just to easy to resist, consider making a change!  Why not open a savings account at a completely different financial institution and maintain your emergency fund there, knowing this money cannot be touched except for an emergency. 

Give it a Label

Many banks now allow you to name an account and personalize it.  So instead of seeing your account being titled as “Savings” each time you log in, it would read “Emergency fund – don’t touch!”  Adding that “name” or “purpose” to the account has been proven to dramatically increase savings levels and decrease the likelihood of spending out of the account. 

Keep it Simple

Separating accounts for each individual goal in retirement, however, is pretty unrealistic.  Who wants to have 20 different IRA accounts?  At The Center, we like to keep things simple to stay organized and on track.  However, our advisors do encourage clients to compartmentalize in their minds when looking at their overall stock/bond/cash allocation to stay focused and not lose track of the purpose of each type of asset that is held within the portfolio.  Each “bucket” of funds has a purpose and impact on the total portfolio and it is The Center’s job as your trusted advisor team to help you fill each one and utilize them to their maximum potential.  

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Why Being an Investor is Like Being a Sports Fan

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As an enthusiastic fan of the Detroit Tigers, I entered into this baseball season with high expectations.  According to Las Vegas odds-makers, our local team is the favorite to win this year’s World Series, given the talented roster we have in place.  As the season has gone on, I have found myself riding a rollercoaster of emotions as the team has had impressive streaks of success, as well as discouraging displays of mediocrity.  In a way, this reminds me of the emotions many of us feel as investors as we watch the ebbs and flows of the stock market.

Behavioral Finance

Behavioral finance is a term used to describe the behavioral and psychological reasons why people make irrational financial decisions.  Interestingly, many of these behavioral tendencies are similar to those of sports fans.

  • Following the Crowd (herding) – As investors and as sports fans we may jump on and off the bandwagon. As investors, we may panic and decide to make dramatic shifts in our asset allocation in reaction to a market downturn or upswing. As sports fans, we may bet our entire fortune on our favorite team when they’re winning or move our allegiance to another team altogether when they’re losing.

  • Short-term Focus – With investments, as with sports, we care about what’s happening now, but can lose sight of the long-term goal. It is hard to keep in mind that the 5 game losing streak (or 5% market pull-back) may have little to no impact on the team’s record after 160 games (or achieving the results we need to meet our retirement goals).

  • Finding Someone (or Something) to Blame – When things aren’t going well, there is always a scapegoat. When our favorite sports team is doing poorly, we can always find one player or coach that’s to blame. When our investments aren’t performing the way we’d like, we can find an investment vehicle or manager to blame. Know that if you have good line-up and a solid strategy, there is no need to place blame (especially when the investment you blame now may be your best performer next year!)

The ability to avoid reacting irrationally is the sign of a long-term investor and of a loyal sports fan.  When it comes to investing, your financial planner can be your best coach, helping you to stay in the game, even when the going gets rough!

Sandra Adams, CFP®is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Investing involves risk and investors may incur a profit or a loss.

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In Life & In Investing, Knowledge is Not Experience

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 Some people are very smart; they have many designations and/or degrees.  They are well-read in the big topics of life. But that does not mean they are experienced in all areas.  The luxury of working with fantastic entrepreneurs, scientist, doctors, lawyers and accountants is a daily way of life at the Center.  These fabulously smart people in their area of expertise delegate the area of their life that they don’t have the time or interest that is necessary to become an expert.

When the financial meltdown was fully in gear between September of 2008 and March of 2009 and when GM and other large companies were going bankrupt, many in our industry and even more outside of the industry were losing their heads (believing that the world might actually come to an end). Internally we were discussing much more productive things. We believed that it was not the end of the world. In fact, we believed that the investments we maintained for clients were real and people would be using the products and services generated by these companies for generations to come.

A doctor told me once that an expert knows more and more about less and less.  He performed one type of surgery every day for over 10 years.   He went to medical school and spent over 12 years in total with his education, much of the last 4 years focused on one area.  He went on to tell me that education is one necessary ingredient – it’s the foundation for wisdom -- but without repetition, you don’t have experience.  At the Center we pride ourselves on the foundation of knowledge but leverage our many years of experience to help clients reach their goals.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James.

Great Investment Performance is Not Enough

 "The economy is suffering" and "Job loss" and "Euro crisis" ... you've likely been reading a lot of bad news about the economy lately. Especially in this election season, the worst often gets pushed center stage in campaign ads and speeches. But instead of focusing on the buzz, take a look at the facts. Below is a chart of returns over the past year from 8/20/2011 to 8/21/2012.  The S&P 500 returned over 28% including dividends!!!

Source: Morningstar Direct

This has happened during a time when:

  • United States Treasuries lost their coveted AAA rating from S&P debt rating agency
  • National Unemployment remains high
  • The Euro Zone continues to be engulfed by concerns over debt

And that is just to name a few of the scary headlines we’ve witnessed over the past year. Regardless, though, the market continues to march on.

Unfortunately, the average investor has been divesting in the U.S. markets consistently since 2008 rather than investing. The chart below shows that the average retail investor (that is you and me), represented by the blue and orange areas, has been consistently pulling money out of US stocks while institutions, represented by the green area, have been consistently investing.

Source: Morningstar Direct

You might ask where has the money been going.

  • A large amount has been flowing into U.S. Bonds (despite the downgrade and historically low interest rates)
  • Some has left the market to pay down consumer debt
  • Many are moving over to exchange traded instruments to find their U.S. Stock exposure

It is hard to say if the average investor is permanently scared away from buying U.S. Stocks, but do not count on the media to make it feel any easier!

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. The S&P 500 is an unmanaged index or the 500 widely held stocks that are generally considered representative of the U.S. stock market.  Inclusion of these indexes is for illustrative purposes only.  Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual performance.  Individual investor’s results will vary.  Past performance does not guarantee future results.  Dividends are not guaranteed and must be authorized by the company’s board of directors.

The Anxious Investor

Ripple effects from the global financial crisis and recession of 2008 are etched in our memory.  In a previous post, A Fear-Driven Investor, we discussed the tendencies investors display when decisions are driven by fear or greed.  When fearful investors can let go of what scares them about the market, the course evens. It’s not unlike letting go of fears in other areas of life. 

When I think of the fear-driven investor, I think about what happens to confidence and decision making when we feel worried and anxious. Have you ever tried doing anything when you are worried and anxious?  I think about the first time I went kayaking on Lake Huron with my sister. 

My sister was more expert than I.  I imagined a big, smooth pond and a sleek little kayak but I really had no idea what I was doing especially when the storm clouds blew in.  My idea of kayaking was to relax more and stay physically fit; however I was a bit fearful and anxious about tipping over when the waves got bigger!  

What happens to anxious kayakers?  I quickly found out! When your body is loose, you can move the boat and make adjustments.  When you get anxious and stiff, the boat becomes tippy and unstable. Once I understood how one decision affected another, I began to relax and I started doing much better.  

If you are driven by news rather than an investment plan, you may end up tipping your portfolio like I tipped my canoe. 

Want to avoid getting “wet”? Here are 3 tips for investors to help reduce anxiety and promote a smoother ride:

  • Set realistic expectations - Trying to refine the future to a point where you will never be surprised creates a headwind that is hard to overcome.
  • Understand the effect your financial decisions have on other financial issues - Focus on your own behavior, not the market’s behavior. 
  • Re-evaluate your investment plan periodically - Small and consistent course corrections are just as important as the plan.

I still kayak on occasion, and I’m always reminding myself to stay relaxed and in the flow. It’s something I remind myself on a regular basis when planning investments as well. It’s much easier to keep your boat afloat when you loosen up, especially when the investment waters get choppy.

Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Investing involves risk, including risk of loss.

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