2015 Behavioral Finance


As the calendar year comes to a close, many investors make the mistake of focusing on the potential for a near-term Santa Claus rally and do not spend enough time formulating an investment plan for the coming year.

Behavioral finance is becoming increasingly more important for determining the optimal outcome for investors. Unfortunately, many perceive successful investing as an entitlement. In order to provide your portfolio a higher probability for success, there are select behaviors that must be defined well in advance.

One of my favorite books, although more focused on trading, is Market Wizards: Interviews with Top Traders by Jack Schwager. One of those traders, Ed Seykota, offers the profound statement, “Everybody gets what they want out of the market.” Those words are so true, and probably can be related to more than just investing.

With that in mind, here are 10 behavioral finance themes worthy of investors’ careful consideration.

  1. Forget the holiday drink, have the holiday meeting

It is imperative that you work with an advisor. Successful investing breeds itself within a team strategy. Do not go it alone. Use this time to formulate a defined strategy for 2015. Place a heavier emphasis on the first quarter, and schedule early March, June, and September meetings now for a quarterly review.

  1. Prepare for the worst, hope for the best

Your 2015 strategy should be predicated upon “preparing for the worst and hoping for the best.” Do not quiz your advisor on how much profit could potentially be earned. Rather, understand the fundamentals of owning that asset and put a plan into effect that can minimize losses should your strategy be flawed. Once the risk is defined, that’s when the particular allocation should be determined.

  1. Use sports analogies

Expanding upon the previous theme, let’s use two sports analogies. First, always identify not what you can earn, but how much you can lose. Winning football teams score touchdowns and only give up field goals. Second, a strong defense is your best offense. Winning baseball teams keep “crooked numbers” off the scoreboard.

  1. Do one thing differently

It’s your money and your potential loss. No bailouts are coming for you. That said, everybody seeks diversification in his or her portfolio. What I find to be a unique strategy is to understand all consensus views and to allocate a small portion of one’s portfolio against a particular consensus view. In doing so, if proven correct, you have provided yourself a small degree of diversification, as the consensus view is unwound.

  1. Consult your budget

Life is meant to be enjoyed, and utilizing your money is helpful in doing so. We all have extraneous needs; identify now what potential financial events there could be for you in 2015. Those funds are not to be invested. One of the worst investment decisions that can be made is a “forced” one. Never put yourself in the position where your budget requires you to make an investment decision.

  1. Identify investment themes from today’s evidence

One way to impede your portfolio from achieving an optimal outcome is to assess investment themes based on “what if” scenarios. There is economic and fundamental evidence to understand right now. Use it. Think back a year ago and how anxiety surrounding “what if” scenarios motivated investors to reduce allocations to municipal bonds, health care, or overall risk itself.

  1. Reserve Mondays for observation

I have made it a habit not to implement changes or act in an aggressive capacity on Mondays. Think of the emotional stake in place. Investors and speculators alike are greeted by a weekend’s worth of information to quickly digest in just a few hours. There is a reason markets tend not to peak or trough on Mondays. If an investment decision needs to be made, I prefer to allow for a few consecutive days so that thoughtful, non-emotional decisions can be made. Do not hurry to judgment.

  1. Keep a calendar

With the advent of smartphones, it is much easier to keep a calendar. Whether social events, business obligations, or a hobby, they are most likely prominent on your calendar. Do the same on a quarterly basis for a few select events surrounding your investments. Nothing complicated, just gentle observational reminders.

  1. Walk, don’t run, to begin the year

Inherently, the start of a new year is a time of enthusiasm and commitments to new things. For investors, however, the month of January should not be greeted with the same degree of excitement and emotion. Go slow, don’t rush, be deliberate. Historically, January’s price action tends to set the tone for the quarter or even the year. Let the price action unfold, earnings be reported, and large flows of institutional capital be allocated.  January is like a Monday; I prefer to be an observer.

  1. KISS

We conclude with what has personally been the optimal strategy for me over the years: “Keep It Simple, Stupid,” or KISS.

Whether you agree or disagree with these behavioral finance themes, I can emphatically tell you they are derived from my observations of the best portfolio managers, hedge funds, passive investors, and active traders.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.