behavioral finance

View from the Chair: Windermere's Market Perspectives (October 2019)

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2019 has not been the easiest year to be an investor. It seems we take a few steps forward, only to be forced to then take a step back. The year starts strong, only to pull back a bit in recent months. The consumer continues to show great signs of strength, only to be dampened by manufacturing data. The trade talks looks positive, until a news report tells us otherwise. One step forward, one step back, one step forward, one step back. It can all get a bit tiresome.

I get it. It can be really hard to stay committed to your investing plan when markets (or the country or the entire world) seem to be stuck in neutral. So what’s an investor to do? Much like the rhythm of 2019, I think the best thing we can all do is take one big step back and focus on the following five items:

1.) Level set expectations

Most humans suffer from a recency bias, meaning that things that have happened to us in the recent past have a higher likelihood of re-occurrence in our minds that may actually be the case. A classic example in investing is expected returns. Take US equities for example. From 2009- 2018, on average, S&P 500 has returned 13.6% per year. We may very well expect those returns to repeat. We forget that such returns were coming off a low starting point post-financial crisis and were aided by extreme monetary policy. We need to level set our expectations from where we are today. Financial assets price off of interest rates. In a world where the risk free rate (commonly accepted as the 10-year US treasury rate) is just above 1.5% (as of October 8, 2019), equities are trading near historical norms in terms of valuations, and growth in the US economy seems to have leveled off at ~2-3%, our expectations of returns across asset classes (including US equities) for the next decade need to be tamed.

2.) Revisit your goals

I know what your’re thinking - “everyone gives this generic advice.” Perhaps you’re right - but I’d argue that it’s for a good reason - because it’s sound advice! Take a step back and do the hard work to determine what rate of return do you actually need to achieve to meet your goals. Given your earnings trajectory, savings, spending, and plans for your life, what return do you need to earn on your invested capital? This answer will be different for each and everyone of us. But without taking that step back and doing some analysis, you could either be worrying about meeting a return that you don’t need to meet - or be chasing an unreasonable return that still isn’t enough without other accompanying changes (such as working longer or spending less). The sooner you know where you’re trying to go and understand the reasonable realm of returns to get you there (see #1), the better.

3.) Check in with your emotions

None of us like to “lose” money. It’s just how we are wired. Once we hit a high water mark on our investment statements or our net worth statement, we certainly don’t want to fall back below it. Unfortunately, asset prices don’t just move in one direction and are almost never directly linear. When values fall, take a step back and consider why it is bothering you. Is it a simply a wealth effect, meaning you feel bad because the number is lower but not because your life has to change in any way because of it? Or, is there an actual impact due to your invested assets declining in value (such as an inability to pay your bills, retain your housing, support your lifestyle, etc). As we’ve said before and will say again, we highly suggest having 3-5 years of needed liquidity in cash, cash equivalents, or very short term fixed income (in additional to day to day cash and emergency savings). Why? Because if risk assets decline in value, we don’t want you having to withdraw on them during a downturn. And, if you know your life won’t be impacted by declines, they likely won’t bother you as much. Having this set-up allows you to take a step back, acknowledge the discomfort of the wealth effect, but then go about your day knowing your liquidity needs are met for the foreseeable future

4.) Widen your lens

Investing technology has come a long way. We used to have to wait for monthly statements to see the change in value. Now, we can watch the green or red figures and percentages second by second on our phones. Focusing on a day’s change (or even a year’s change) is a little short-sighted. Odds are you have been investing for years, if not decades. Take a step back and widen out your lens. How have you done in the past 5 years? The past 10 years? Since you started? My guess is that you have built wealth thru your investing efforts over time and have likely not “lost money”

5.) Look around you

Financial management is a team sport. I’d suggest taking a step back and looking around you. Who do you see? Do you have a spouse, parent, or friend that you can talk to about financial worries or concerns? Do you have a financial advisor that can help you set-up a plan and understand required rates of return? Do you have access to sound legal and tax advice when needed? Are you using these people and turning to them when you have questions or when fears pop into your mind? Don’t try to go it alone. Invest in your financial journey and your financial teammates whenever possible.

Sometimes it’s necessary to take a step back in order to take a step forward. Give it a try, let me know what you think

Invest on,


View from the Chair: Windermere's Market Perspectives (March 2019)

We all like to think we are fully rational human beings, capable of staying in control of our emotions and making sound decisions in all areas of our lives - especially when it comes to investing. When markets are steady and moving in a upward trajectory, many of us are able to operate in a “calm, cool, and collected” fashion. However, when volatility arises and markets correct, we tend to lose that focus and revert to our subconscious behaviors. (Just think back to your mindset in November and December of 2018 and I’m sure you’ll identify with some reactionary thinking).

While there are countless behavioral finance biases that impact all investors , today we’ll focus on one that has come up in many conversations as of late - anchoring


Anchoring refers to our tendency to attach (or anchor) our thoughts to a reference point - even if that reference point may have no logical relevance to the decision at hand. Here are just a few examples of anchoring - and some suggestions on how to overcome it in and “set sail” from here on out

1.) High-water mark

I’m guessing you may know this number - the all-time high balance you observed for your investment portfolio. Perhaps you arrived at that amount in January 2018 or in early October 2018 or in recent weeks. Regardless of the exact date, you likely know the number and have evaluated your portfolio’s performance against that mark ever since. You may find yourself thinking things such as: “if I could only get back to that value” or “when I get back to that value I’ll (fill in the blank),” or “had I known what was coming, I would have moved to cash when I hit that level”

If you step back, what does that value really represent in your investing journey? Not much - it’s simply a reference point. One of many reference points during a multi-decade journey. Had markets kept advancing past that point would you be focused on that value? Likely not. Would you really have altered your whole investment approach when you reached that number (without any other information)? Again, likely not. Is it logical to compare your performance to that number? Again, no.

That number only has relevance because you have anchored to it. There’s no going back - we are sailing forward and can’t go back. Consider focusing on more relevant comparisons such as the return of your blended investment benchmark over the comparable time period and your unique return goals. How are you doing in comparison to those metrics? Pay attention to relevant data points and you may just pass by that previous anchor

2. Evaluating individual stocks

Anchoring is especially prevalent in evaluating individual stocks, especially when it comes to selling vs holding (or adding to) stocks that have fallen in value. As an example, if we pay $50 for XYZ company and it falls to $30, we become very focused on that $50 price point (we anchor to it). “I’ll sell it when it gets back to $50” or “I’ll just hold on until it gets back to break even - but I’m not buying more” We’ve anchored our assessment of that company’s fair value to the price we paid for the stock, which truly is not all that relevant.

That price you paid is what the market was willing to sell it to you for on that given day. After you buy it, that price isn’t all that relevant any longer. Instead, you should continue to do your homework and independent research and determine what you believe to be the fair value of the company (and its underlying stock). If the stock remains below the fair value by a margin that is more attractive than other alternatives, it may be worth holding - on even adding more. If the stock has exceeded your fair value estimate, perhaps it’s time to move on and find another under-valued opportunity. But to anchor to the price you paid (or even to the current trading price) won’t help you make an informed decision.

Stock markets may be the only marketplace in the world where consumers don’t like to buy as prices come down. However, with the right reference points in your sight-line (ie: your estimates of fair value, independent of price you paid or current trading prices), you will have a shopping list ready to go during the next pullback

3. Market estimates

Anchoring also comes into play in our forecasting of general market performance. Investors tend to anchor on the current level of an index as their reference point and using that, make estimates that tend to be very close to the current level. As the Dow Jones approached 27,000 in early October 2018, estimates were clustered around 28,000 - or even 30,000. And when markets corrected and started to fall, estimates were quickly revised downward, in lockstep with the actual moves in the indexes themselves.

Instead of anchoring to a current index level in determining how to allocate your capital, consider evaluating the current state of the economy and more importantly, the rate and direction of change of those elements. Where do we stand in terms of growth, inflation, interest rates, economic activity, and labor force? And are these components getting better or worse? Those are relevant data points in determining when and how to allocate your capital to various asset classes

Anchoring is an instinctual human behavior - one that we have all been guilty of from time to time. Remaining aware of these examples - and the tactics to pull up your anchors in future - will make you an even better investor going forward.

Let’s sail forward and leave those anchors behind!


Ways to overcome anchoring

*Carefully evaluate your refernece point - is it the rigth metric

*Independent analysis

*Compare to alternatives at the present moment - not the asset in the past