Monthly Archives: November 2016

9 Psychological Traits that Can Lead to Underperformance in Your Investment Decisions

November 10, 2016

When You are Making Investment Decisions, Leave Your Emotions at the Door

Causes of Poor Decision Making

Financial Fact 1

These days, I find myself talking to clients quite a bit about the biggest risk to their portfolio: emotional decision making. During these conversations, I often refer to Dalbar’s Quantitative Analysis of Investor Behavior Study. The title speaks for itself because the report explains how the average investor can make unfavorable investment decisions over time. Take a look at the powerful data in the chart below and notice that over time the average investor underperformed the S&P 500 by 6.1 percent:


Source: J.P Morgan Asset Management; Dalbar Inc. Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays U.S. Aggregate Index, Homes: median sale price of existing single-famil homes, Gold: USD/troy oz, Inflation:CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/15 to match Dalbar’s most recent analysis. Guide to the Markets – U.S. Data are as of September 30, 2016.

Indexes are unmanaged and cannot be invested in directly. Past performance does not guarantee future results. 

The Dalbar report not only illustrates investor performance, but it also takes the time to describe why the average investor underperforms the market. Their number one finding for underperformance is not fees or transaction costs, but the psychology of individuals. Dalbar goes even further to define and characterize the traits that lead to underperformance:


1. Loss Aversion – The fear of loss leads to a withdrawal of capital at the worst possible time. Also known as “panic selling.”

2. Narrow Framing – Making decisions about one part of the portfolio without considering the effects of the total.

3. Anchoring – The process of remaining focused on what happened previously and not adapting to a changing market.

4. Mental Accounting – Separating performance of investments mentally to justify success and failure.

5. Lack of Diversification – Believing a portfolio is diversified when in fact it is a highly correlated pool of assets.

6. Herding– Following what everyone else is doing. Leads to “buy high/sell low.”

7. Regret – Not performing a necessary action due to the regret of a previous failure.

8. Media Response – The media has a bias toward optimism to sell products from advertisers and attract/view readership.

9. Optimism – Overly optimistic assumptions tend to lead to rather dramatic reversions when met with reality.



Source: “Quantitative Analysis of Investor Behavior, 2016, “DALBAR, Inc.

Of the behaviors, Dalbar found “herding effect” and “loss aversion” to be the biggest problem for investors. It takes only one bad decision every three to four years to have a negative impact on the longevity of a portfolio. We believe it is exceptionally important for investors to realize that we all have these natural tendencies to be emotional about our decisions. The realization and acceptance of these behavioral tendencies are the first steps to moving past them.


One of the main reasons I am focused on having this discussion on behavioral investing today is because of where we sit in the current stage of this market. There has been quite a bit of volatility in the market in 2016. To be frank, we do expect to continue to have this roller coaster ride in the market despite the fact that we do not expect a recession in the near-term horizon. This is a change from what we saw out of the market in 2010-2014 as the S&P 500 averaged double-digit returns with unusually low volatility. In a period of higher volatility, it is important not to think too short-term about investments so as to ensure there is no overreaction when pullbacks occur. A better strategy is to consider the opportunities afforded to us on pullbacks and at what levels they become buying opportunities.


I recently wrote an article on the psychology of how financial stress may lead to actual physical pain. Click here to read the article.

Financial stress may lead to actual physical pain.

What Nick's Reading Portrait


Nick Johnson, CFA®, CFP®

Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

As Vice President and a Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.




How do you position your portfolio to handle rising interest rates?

Did you know that futures markets in the Federal Funds rate are anticipating an increase in interest rates by the end of the year?

A good indicator of what the market perceives on how rates will change is the 30-day Fed Funds Futures contracts, which are traded on the Chicago Mercantile Exchange. As of November 1, 2016, the contracts trading for December 2016 expiration are pricing in a 0.50% Federal Funds rate, demonstrating the consensus view among market participants that rates will increase by the end of the year.

How do you position your portfolio to handle rising interest rates? When looking at bonds, the best measure of their sensitivity to changing interest rates is duration; lower duration bonds mature more quickly, and can better react to rising interest rates. If the duration of your bond portfolio is between three and five years, your portfolio will be relatively well positioned as rates go up. Longer duration bonds, those of ten years or higher, will get significantly hurt as rates rise.

Investors also turned to the stock market in a search for yield in this depressed interest rate environment, driving up prices in high dividend sectors such as Utilities, REITS and MLP’s. As interest rates go back up, investors should watch how these sectors respond if their dividend premium goes away. Given the pervasive ramifications of interest rate increases, you should ask your advisor how your portfolio will react to higher interests. 

Please reach out to your advisor if you would like to discuss the plan for your portfolio.


Investing involves risk, including the potential loss of principal. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Bonds are also subject to other types of risks such as call, credit, liquidity, interest rate, and general market risks.

Jason Mishaw

As an Associate Wealth Manager at Willis Johnson & Associates, Jason Mishaw is actively involved in both the Financial Planning role and the Investment Management role. On the financial planning side, he helps to implement customized financial plans for WJA clients. On the Investment Management side, under the supervision of a Senior Wealth Manager, he assesses the financial goals of WJA clients and assists in creating a customized strategy to further those goals.

Jason received a Master’s of Science in Finance at the University of Houston C.T. Bauer College of Business, a B.A. in Economics, and a B.S. in Biochemistry and Cell Biology from Rice University.

The Markets (as of market close October 31, 2016)

November 4, 2016

Market Update 2016Trading in the early part of October saw equities respond negatively to rumors of a pullback on stimulus measures by the European Central Bank, which ultimately proved to be unfounded. Each of the indexes listed here closed the first week of October below their respective September closing values, except for the Global Dow, which eked out a marginal gain. Markets continued their tailspin during the second week of October led by the Global Dow and Nasdaq, each of which lost close to 1.5%.


Stocks rebounded during the third week of the month, posting week-over-week gains by the October 21 market close. Nevertheless, equities fell on the last day of October, closing the month in the red. The Dow fell for the third consecutive month in October, losing almost 1.0%. The S&P 500 lost nearly 2.0% compared to September. But the biggest downturn was posted by the Russell 2000, which plunged about 5.0%. Ultimately, investors may be cautious entering November’s presidential election.


U.S. government bond prices fell during October, as the yield on 10-year Treasuries closed up 23 basis points month-over-month. Gold lost value, closing October at $1,277.80, down $41 from its September closing value.

Click for the Full Update


The information provided is not intended to be a substitute for specific individualized tax, legal or estate planning advice. Individual situations will vary. We can assist you in making informed decisions. No single solution meets all investor’s needs. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

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