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Investor Psychology. Created by Erica Abbott USU Family Finance Student and Dr. Jean M. Lown. Last October’s FPW program is available at www.usu.edu/fpw under past presentations. Outsmart your brain: Trick your mind to treat your finances Focused on money management

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Investor psychology

Investor Psychology

Created by Erica Abbott

USU Family Finance Student

and

Dr. Jean M. Lown


Last october s fpw program is available at www usu edu fpw under past presentations
Last October’s FPW program is available at www.usu.edu/fpw under past presentations

  • Outsmart your brain: Trickyour mind to treat your finances

    • Focused on money management

    • Watch PPT on YouTube: http://www.youtube.com/watch?v=B09ff4dZBuc

  • Today’s focus: Investor Psychology


Handout pf action plan
Handout: PF Action Plan

  • For your use

  • Commit to take action

  • Share your plans with family & friends


Why do investors earn less than market returns
Why do investors earn less than market returns?

  • Studies confirm actual investors earn below market returns. Why?

  • DALBAR: “average investor earns less - in many cases, much less - than mutual fund performance reports would suggest.”

  • Past 15 years: investors in US stock funds earned 2.3% less than the funds themselves (Morningstar report)


What investors do wrong why
What investors do wrong & why

  • React emotionally to $ news

  • Buy when news is good & prices high

  • Sell when news is bad & prices low

  • Jeff Salisbury’s tuna fish analogy

    • Load up the pantry when canned tuna is on sale

    • Buy little or none when price is high


7 deadly sins of investing kip nov p 30
7 Deadly Sins of Investing (Kip. Nov. p. 30)

  • Following the herd

  • Giving in to fear

  • Hanging on too long

  • Neglecting to rebalance

  • Making things complicated

  • Paying too much in fees

  • Failing to stick to the plan


1 following the herd
1. Following the herd

  • When an asset class soars… investors pile in

    • After the price has risen

    • Buy high (& sell low)

    • “Past performance is no guarantee of future returns.”

  • What to do: “Follow rules, not herds”

    • Don’t be swayed by CNN, Jim Cramer, etc.

    • Dollar Cost Average each month on autopilot


2 giving in to fear
2. Giving in to fear

  • 2008-09 financial market meltdown--> avoiding stocks

  • Volatility is scary but losses are only on paper until you sell

  • Federally insured accounts don’t keep up with inflation & taxes

  • Need stocks for long term goals


Solution focus on long r un
Solution: Focus on Long Run

  • Since 1926 US stocks (S&P 500) averaged 10%/year (before taxes & inflation)

    • Lots of volatility along the way but upward trend

  • Worst case- Invested @ peak: March 2000

    • 2 horrendous bear markets

    • Positive 3.4% annual return

  • Stock market is place for long term $


3 hanging on too long
3. Hanging on too long

We become psychologically invested in what we own…

Own a winner? Can‘t part with it

Own a loser? To sell would reinforce the pain


Redemption
Redemption

  • Have a sell strategy

  • Review investments yearly

  • For stocks/funds you own- would you buy it today?

    • No? sell part or all

    • Adopt a target price to sell


4 neglecting to rebalance
4. Neglecting to Rebalance

Manage risk by diversification &

Asset allocation

Establish a % share for each asset

category based on risk tolerance

& time horizon


Redemption1
Redemption

  • It may be counterintuitive but..

  • Rebalance each year by

    • Sell some winners and buy some from loser category, or

    • Buy only in the loser category

  • Forces you to Buy Low & Sell High!


5 making things complicated
5. Making things complicated

  • Too many different investments

  • Resembles an index fund but…

    • At much higher cost

  • Redemption: buy index mutual funds or Target retirement date funds

    • Kiplinger 25 (list of “best” funds)

    • Money 70 (list of “best” funds)


6 paying too much in fees
6. Paying too much in fees

  • One thing you can control: expenses

    $10,000 & invest $500/month @ 8%/yr.

    For 30 years

    Index fund 0.20%: $818,639

    Active fund 1.2%: $662,916

    Difference: ~$156,000


Redemption2
Redemption

  • Compare expense ratios of mutual funds

    • FINRA fund analyzer http://apps.finra.org/fundanalyzer/1/fa.aspx

  • Consider the buy/sell costs of stock trades

    • Full service broker: $75/trade

    • Discount broker: $10/trade


7 failing to stick to your plan
7. Failing to Stick to Your Plan

  • Greatest sin: failing to formulate & follow a plan

    • No plan- how will you know if you are on track?

    • Specify your goal (SMART) & time line

    • Having a plan helps you resist the other “sins”

  • What are YOUR goals? Time horizon? Plan?


Using behavioral psychology to help
Using Behavioral Psychology to help

Behavioral Principles http://www.ideas42.org/category/theory


Limited attention
Limited Attention

  • Can’t text, listen to music & drive… humans are not good at multi-tasking!

  • When attention is stretched, people have difficulty focusing on benefits & consequences of options.

    • Default options (instead of too many choices)

    • Automatic saving/investing


Status quo bias
Status Quo Bias

  • Comfortable & familiar

  • Change the default through…

    • Retirement auto enrollment

      • Few opt out

    • Target retirement funds

      • Diversified, choose year of planned retirement


Mental accounting
Mental Accounting

  • Assigning $ to different buckets: rent/mortgage, car payment, etc.

  • Plus- prevents spending the rent on dinner out

  • Minus- using credit increases spending up to 18% over cash. Such outcomes are difficult to avoid as most credit decisions are ambiguous

  • Linking saved money to a particular goal –i.e., college –makes us reluctant to spend the $ for other things

  • Take away: 529 UESP College Savings accounts


Social norms
Social Norms

  • “If everyone else jumped off a bridge…”

  • Teens aren’t only ones who care about what everyone else is doing. Knowing what others do provides a reference point against which people can compare options when they are unsure about what to do.

  • We misperceive social norms, esp. when some choices are highly visible & others aren’t

  • a clearer picture of what constitutes “normal” behavior for peers, friends, neighbors, or citizens can make us more inclined to do same.

  • Take away: save 15% of income


Planning fallacy
Planning Fallacy

  • We underestimate amount of effort & time to complete a task.

  • makes it hard to do things like signing up for retirement savings

  • Take away: Commit to action & tell friend/spouse/partner/coworker to

    • Hold your feet to the fire


Prescriptive descriptive fallacy
Prescriptive & Descriptive Fallacy

  • We know what we should do…

  • Wash hands, offer pregnant women seat, but…

  • Instead of telling people what they should do, simply inform people of descriptive norms— what the majority of people actually do.

  • R: knowing what other people do is a stronger influence on how they eventually behave than knowing what society saysthey should do


Procrastination
Procrastination

  • When’s the most popular day of the week to start a diet? Start/increase saving/investing?

  • Tomorrow.

  • The more steps involved, the more likely someone is to procrastinate.

  • Too many choices procrastination

  • Take away: acknowledge & commit


Self control problems
Self-Control Problems

  • At some point even the most disciplined person will succumb to temptation.

    • We have good intentions, but poor follow-through.

  • Especially true where future gain (more financial security) comes at cost of up-front loss (saving instead of spending)

  • Take away: retirement withdrawal penalties

  • CD/I-bond withdrawal penalties


Choice overload
Choice Overload

  • Too many choices can be overwhelming.

    • People make poor choices or fail to choose

    • Jam research study

  • Get help in choosing!

    • Enlist the help of knowledgeable person

      • Retirement accounts- more choices is NOT better

      • Focus on the basics


Availability representativeness
Availability & Representativeness

  • Present choices in a way that highlights the important context

  • Indicating life expectancy of a population can help people make better decisions about whether they should claim Social Security benefits at age 62 or 67 & prevent people from miscalculating probability that they would not benefit from waiting.

  • Take away: You are unique. Estimate your life expectancy w/ online calculators


Problem saving requires attention self control
Problem: Saving requires attention & self-control

  • When $ is tight, mental resources needed to save are stretched thin, too.

    • Behavioral interventions such as automatic transfers to savings or reminders about savings goals


Emotions get in the way
Emotions Get in the Way

  • Fear & Greed/exuberance

  • Fear -> excessive risk aversion

  • 2008-09 huge outflows from stocks

    • Market bottomed in March 09 & quickly shot up

    • Investors who sold locked in their losses & sat on sidelines while the markets rallied


5 ‘A’s of Successful Behavior Change

  • Awareness: Realize that you want to change or improve something

  • Your Ability to change:

    • Is this something you can actually control?

    • Do you need someone else to change with you? i.e. a spouse?

  • Ambition: Consider your desire to change

    • Is it strong? Are you on the fence about it?

  • Attitude: Positive? Negative? Back and forth?

    • “Nothing can stop the man with the right mental attitude from achieving his goal…” – Thomas Jefferson

  • Action: Start implementing the actions that you would need to change certain behaviors

  • Small Steps to Health & Wealth


    Goal setting
    Goal Setting

    • Write your goals down where you will see them

      • “Goals that are not written down are just wishes.” -Author Unknown

    • Websites send you reminders about your goals

      • Stickk.com

      • Mint.com: Sends cell phone reminders when you go over budget. Plus gives you updates on your goals!


    Power of focus
    Power of Focus

    • Focusing on too many things is overwhelming

      • Paying off debt, savings, retirement, down payment on a home, etc. Which should come first?

    • It might be better to focus on one primary goal at a time


    Visually Track your Progress

    • Helps remind you of your goals

    • Seeing progress is motivating

    • Gets your family involved

      • Positive peer pressure


    Visually track your progress
    Visually Track your Progress

    • Use a phone app

      • Mint.com

    • Use a savings thermometer

    • Tickers from websites

      • Tickerfactory.com



    Spend less pay with cash
    Spend less: Pay with Cash

    • McDonald’s allowed credit card purchases- increased average purchase from $4.50 to $7

    • Journal of Experimental Psychology: “Cash discourages spending, and credit or gift cards encourage it…”

    • Credit card users spend 12-18% more when using credit instead of cash (Dun & Bradstreet)

      • Spending increases even more when credit card offers rewards or cash back


    WHY??

    • “…losing something makes you twice as miserable as gaining the same thing makes you happy.” Nudge by Thaler & Sunstein

    • Paying with cash induces a feeling of loss, whereas swiping plastic, only to put it back in your wallet, does not



    Make it automatic
    Make it Automatic

    • Set up automatic deposits to savings, investments, & bill payments

    • Once it’s done, you don’t have to think about it anymore!

    • Biggest step is making

      the time to set it up

      • “Execution”


    Autopilot dollar cost averaging
    Autopilot: Dollar Cost Averaging

    • Automatically invest same amount every pay period

      • Regardless of market gyrations

      • Removes the emotion & temptation to subvert your plan

      • Eliminates the need for willpower


    Trick yourself to save more
    Trick yourself to save more

    • Pre-commit to a decision

      • Consumers are more impatient in the near-term than in the long term

        • Seek instant gratification

    • Feed the pig next month

      • But sign up today!


    Pre commit to a decision
    Pre-commit to a decision

    • We’ll commit to saving $100 five weeks from now, but we won’t commit to saving $100 this week.

      • How to create a good habit:

        • Sign up to increase (or start) your 401(k) contributions (emergency savings, power payments, student loans, & credit card payments) starting in a few weeks or months

    You’re less likely to undo that decision & more likely to start a good habit


    Unless commitment is made there are only promises and hopes but no plans peter drucker
    “Unless commitment is made, there are only promises and hopes…but no plans.”-Peter Drucker


    Increase the cost of not doing something now by using

    Increase the cost of NOT doing something hopes…but no plans.”now by using

    Commitment Contracts


    Put your mind to it
    Put your mind to it hopes…but no plans.”

    “One of the most powerful motivational strategies to… increase wealth is visualization. People can alter their lives just by altering their mindset. Visualization (a.k.a., mental imagery) is a powerful step in the process of setting and achieving goals.” SSHW

    What is your vision for your goal?


    Commit to making a change sshw
    Commit hopes…but no plans.” to Making a Change (SSHW)

    • 5 stages of change (Transtheoretical Model)

    • Precontemplation- unaware

    • Contemplation- recognize need to change

    • Preparation- Commit to make changes

    • Action- take the plunge & make changes

    • Maintenance- sustain change & reap benefits

    • Studies show that “plans to change” can predict actual change.


    Commitment contracts
    Commitment Contracts hopes…but no plans.”

    • Telling others about your goals & plans helps you stick to them

    • Regular reminders from family & friends increases likelihood of success

      • Self-inflict peer pressure to improve your financial situation!

      • Failure to follow through willresult in your anti-charity receivinga donation from you!

      • Sign your contract today!!


    Commitment contracts1
    Commitment Contracts hopes…but no plans.”

    www.StickK.com

    • If you don’t do ‘X’ you’ll have to pay ‘Y’ to an ANTI-charity of your choice

    • Recruit a trusted friend as your referee

    • Use for goals such as paying off debt, starting retirement, sticking to your budget, weight loss, smoking cessation, etc.


    Resources
    Resources hopes…but no plans.”

    • Kiplinger Nov. “How to be a better investor”

    • Small Steps to Health & Wealth http://njaes.rutgers.edu/sshw/

      • Overcoming Obstacles and Taking Action

      • Behavior Change Strategies

      • Set a Date and Get Started---Just Do It


    Upcoming fpw
    Upcoming FPW hopes…but no plans.”

    • November 13: Estate Planning

      • Quit procrastinating!

      • What you need to do & resources to accomplish

    • No December program

    • 2014 topics

      • Utah’s health policy project- navigating insurance

      • Financial planner Lon Jeffries

      • Invest in your house: Upgrades that make sense

      • Social Security


    Sign up to follow the fpw blog
    Sign up to follow the FPW Blog hopes…but no plans.”

    • http://www.fpwusu.blogspot.com/

    • Searchable

    • Latest info & advice

    • Answers to your financial questions


    Questions comments
    Questions? hopes…but no plans.”Comments?


    Curious behaviors
    Curious Behaviors… hopes…but no plans.”

    • That can ruin your retirement

    • http://crr.bc.edu/special-projects/interactive-tools/curious-behaviors-that-can-ruin-your-retirement/


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