Picking on Fathers
Doug Walters
On Father’s Day, we remind investing Dads that a little humility can lead to higher long-term returns.
Contributed by Doug Walters , Max Berkovich , David Lemire , Eh Ka Paw
Father’s Day is Sunday, and dads around the country are ready to be spoiled with homemade breakfasts, hugs, and gifts. Ties used to be the go-to gift for dads, but I suppose those days are gone. At Strategic, we have ditched the ties most days, which seemed unthinkable pre-pandemic. Times have certainly changed. But we are not going to coddle fathers in Insights today… quite the opposite.
We talk a lot about behavioral biases and for good reason. One of the primary values an advisor can bring is helping clients avoid common investing pitfalls. One of those is “overconfidence.” Avid readers will recall that we hit this topic a couple of years ago (Avoiding Investor Pitfalls – Overconfidence). But today, we zero in on fathers. As humans, we are inherently overconfident. That’s why, when asked, 93% of US drivers say their driving skills are above average1. 93% believe they are in the top 50%?!? Clearly, we have an overinflated view of our abilities! Unfortunately for us fathers out there, it gets worse.
It turns out many studies have shown that men tend to be more prone to overconfidence than women. In the world of investing, overconfidence leads to excessive trading… and excessive trading has been shown to reduce long-term returns. According to a study by Barber and Odean2, men traded 45% more than women and underperformed by nearly 1% annually. Over time, that is big money!
It is not all bad news for fathers. The data shows that the gender gap for over-trading and underperforming shrinks for married men versus single men. So is our message on this Father’s Day weekend to go and find a spouse so you do not damage your investment performance with excessive trading? No. Anyone can overcome this natural human bias of overconfidence. A good approach is to invest as if you cannot predict the future… because, guess what? You can’t. A long-term approach with a diversified portfolio and a disciplined process is a good start for avoiding biases and achieving long-term investing success.
1. Svenson (1981)
2. Barber and Odean (2001)
Excessive trading by men
The data shows that excessive trading leads directly to lower portfolio returns.
Headline of the Week
Higher for Longer Returns
The Fed followed through on its widely telegraphed plan to pause interest rate increases. However, the post-meeting messaging sowed confusion because it now appears the Fed is aiming for two more rate increases. Pre-meeting consensus was for a June pause followed by one more 0.25% increase in July.
Now the prospect of one extra 0.25% increase does not pack the same punch as earlier rate increases, and markets took the change in stride. In fact, stock and bond moves suggest a little doubt that the Fed will be able to follow through, which brings us back to this week’s headline. Markets can be forgiven for questioning how high rates will go, but they should be careful in assessing Fed resolve to keep rates there longer if inflation remains stubbornly high.
The Week Ahead
With the inflation report and Federal Reserve in the rearview mirror, the short week will be much less exciting than the previous one.
Playing it Safe
The Bank of England is the next major central bank to face a rate decision.
- Despite some of the highest inflation numbers in the developed world, the United Kingdom is expected to report a Consumer Price Index (CPI) decline down to 8.5%, which would allow the Bank of England (BOE) to only nudge rates up by ¼ of a percent.
- The CPI release on Wednesday, whatever it will be, will show progress from the 10.1% inflation in March.
- Right now, the big inflation pressure in the U.K. is in food prices, running at 17% since April. Ouch!
- There will not be a press conference after the BOE decision on Thursday, so no one expects much clarity on future rate moves.
Capital Bound
With rate meeting behind us, interest rate watchers will focus on Chairman Powell’s semiannual trip to Congress.
- Wednesday, Chairman Powel is in front of the House Financial Services Committee, but the real reality television drama will be on Thursday in the Senate.
- Chairman Powell’s archnemesis Senator Warren is expected to muscle the Chairman around. She once called him a “dangerous man.”
- The focus of Senator Warren’s questioning will focus on unemployment.
- The Chairman isn’t the only one on display this week. Several Fed officials have speaking engagements as well.
Day Off
- Sunday is Father’s Day! We wish all of the dads out there an enjoyable weekend.
- The U.S. Markets are closed on Monday for Juneteenth Holiday.
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