Skip to content
Weekly Insights
Subscribe
Volume 11, Edition 17 | May 23 – May 27, 2022

Taming Your Inner Biases for Better Performance

Doug Walters, CFA
A big week in the equity markets provides a good reminder of how dangerous market timing can be for long-term investors. Successful investors need to learn how to tame their inner biases.

Contributed by Doug Walters, David Lemire, Max Berkovich

What a difference a week makes! The stock market erased three weeks of losses in just a few days. Patient investors knew a week like this would come eventually, while the impatient may have locked in permanent losses. As we have said many times, market timing does not pay off, and its negative impacts can compound over time.

There are so many counterproductive behavioral biases that kick in when markets decline. Many push investors to try their hand at timing the market, as we discussed in our whitepaper (Market Timing: Investing or Gambling?). Some of these biases include:

Action bias

this feeling that you must “do something” even though often the best action is no action.

Overconfidence

the belief that somehow you alone know something that the millions of market participants have yet to figure out.

Loss Aversion

the enhanced emotions we feel when facing loss versus the subdued emotions of gain (see our recent article).

The costs can compound over time for those who give in to these temptations. How so? Let’s take this past week, for example. Suppose the previous seven weeks of market declines finally pushed you over the edge, and you decided to sell all of your stocks for cash. To your dismay, the stock market rallied 6.6% this week as you watched from the sidelines before cutting your losses and jumping back in.

Let’s see how that unfortunate scenario plays out in dollars (assuming a $1,000,000 portfolio).

  • Your $1,000,000 sat on the sidelines, so it remained at $1,000,000 at the end of the week.
  • Had you stayed invested, your portfolio would have increased by $66,000.

So a $66,000 mistake, right? Not precisely, thanks to compounding. Long-term investors love compounding! If your stock portfolio grows 9% per year, the dollar value of growth accelerates over time. Unfortunately, the same applies to missed opportunities. That $66,000 that you could have had if you were fully invested this week would have likely grown significantly in time. How much? $66,000 growing at 9% per year would reach:

  • $150,000 in 10 years,
  • $370,000 in 20 years,
  • $875,000 in 30 years.

Yikes! Market timing can be costly. But knowing is half the battle. Being aware of these innate biases that we all have as humans allows us to take control of them through process and discipline.

Headline of the Week

The S&P 500 ended the week up over 6%! Not bad for the first positive week in the past eight. This performance was against the grain of the Federal Reserve Open Market Committee (FOMC) meeting notes which flagged that they may need to move faster than anticipated on rate increases. However, our headline of the week is the fresh read we received on inflation.

A Better Trend

The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) Deflator, came out this week in line with expectations. More importantly, the year-on-year measure fell.

  • As measured by PCE, inflation fell from an annual rate of 6.8% in March to 6.5% in April.
  • Core inflation (excluding food and energy) fell from 5.2% to 4.9%.
  • These are still high numbers, but the trend is finally in the right direction.
  • The Fed’s primary motivation for beginning to put the brakes on the economy is inflation, so this trend is encouraging and will be closely watched in the months ahead.

The Week Ahead

Investors will be drinking from the firehose as a new month means a bunch of refreshed economic data. We will hit just the main points of interest.

Employment

Friday sees one of the month’s biggest economic headlines, the May Nonfarm Payrolls Report.

  • Consensus calls for just over 300k, which would be a decline from last month’s 406k. But still pretty darn good.
  • But before that main event, we will get other barometers on the employment picture with ADP and JOLTS reports hitting.

The Price is…Right Rising – European Version

Consumer Price Index, Producer Price Index, and Import Price Index all hit next week. Less harmful might be the only good given inflationary pressure just about everywhere.

Making a case for Housing

S&P/Case Shiller Home Price Index comes out and while rising rates have trickled into mortgage activity, home prices have continued to trend higher. Whether we’ll continue to see fierce bidding wars as rates rise remains an open question.

Enjoy the Barbeque

Memorial Day weekend officially kicks off the summer grilling season. With colleges out and schools winding down, it’s a great time to reconnect with family, friends, and your grill. Enjoy!!

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.

Related Resources