Our own State Street right here in town is calling out investors and professionals in its just-released Folklore of Finance thought piece. Are you or your advisors guilty of sabotaging your own investment success? See if you are prey to these false folklores.
Big and successful for good reason
State Street Corporation on Lincoln Street here in Boston is among the top of the industry with $2.3 trillion under management, custody of $28 trillion, and they’ve been around since 1792. They are on every investment professional’s ‘must listen to’ list. When Suzanne Duncan’s Folklore of Finance from State Street Global Advisors went live this past Monday morning it moved to the top of our ‘must read’ list. We recommend it not only as a must read, but a must act. Why?
What’s the problem?
“Just because the industry is profitable doesn’t mean it’s successful”. Advisors know that investing based on past performance and imitating their peers does not lead to success, yet the majority do just that. On the other side, investors know they are investing for their long term future but often fail to write down just what those goals mean. As a result of misdirected time and money, financial services clients often feel distrustful and dissatisfied of their money managers and brokers. Sound familiar? Based on this, investors sometimes seek disintermediation, turning to do-it-yourself rules of thumb, cheap robotic algorithm advisors, or magical investment heuristics and phrases. Or they may settle in with reduced expectations and repeated shortcomings. Is this the best I can do, you may ask yourself? Why am I so often unfavorably surprised or disappointed?
The flawed behaviors that undermine individual investors are often the same that derail professionals in their obsession for alpha: overconfidence in personal ability to pick winners, trusting past results as a predictor of the future, giving credibility to pundits, basing investment decisions on short-term news, and many others. Suzanne’s take is that most of these mistakes result from folklore, not facts. Funds given 5 stars are believed to be better bets than 2 star funds. Negative headlines are believed to lead to lower stock prices. Consultants are believed to be smarter than the market as a whole. These beliefs become the conventional wisdom. Folklore is given far more credence than it deserves. In essence, we all think we know more than we do. Let’s face it, the frequency with which you beat the S&P 500 cannot put your kids through college or fund your retirement. Taking on extra and unnecessary risk in hopes of beating the market may cost you dearly.
Help is available
Awareness gets you more than 50% of the way there. Here are the things you can do now to confirm you’re on the right investment track, or that you need to make a change. Suzanne mentions these as the major topics for investors and investment professionals to discuss:
- Avoid the allure of Alpha, stock picking or market timing the way to outperformance
- Do set long term investment goals and refer back to them to guide decision making
- Understand that investment success is only relative to the goals of the investor
- Avoid short-term thinking, market timing is far and above the most punishing factor investors attempt to control
- Watch for overconfidence in picking winners, reacting to news, following investment gurus or pundits, and predicting momentum
- Be aware of ‘false comfort’, the tendency to over-rely on ratings, style boxes, benchmarks, analyst reports, outlooks, etc.
- (Bonus reading) Learn the common heuristic and behavioral pitfalls that all investors are subject to (page 31 of the report)
For State Street’s quick summary, check here. For the full report, go here. Financial Folklore is everywhere, often causing you or your advisor to sabotage your own best efforts. The path to success for investors is through an efficient allocation of time, money and energy to reach long term goals.
Sabotage be gone! The moral of the story
As easy as it can be to accept folklore as truth, there is another way. Try being a tireless advocate of facts. Now that you are aware of the problem – and face it, the industry is very much at fault here – your can begin to make it better. First, sit down with your advisor and review the ‘behavioral biases’ on page 31 of the Folklore of Finance report. Next, request a cost and tax audit of your investment results. Make sure you are not paying for what you don’t get. Last, follow the money and ask your advisor how they are compensated and if that structure creates any conflicts of interest. If that review comes up short, call us. We’d be delighted to show you how you can raise your expectations.
Max Osbon – firstname.lastname@example.org
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.