Wealth Management Blog | WrapManager

4 Healthy Financial Habits Everyone Should Have

Posted by Michael J. O'Connor | CWS®, Vice President Investments

July 25, 2018

4 Healthy Financial Habits Everyone Should Have

Oftentimes when it comes to investing, there are habits/tasks we know we should do, and habits/tasks that we’d maybe prefer to do. Saving 20% of every paycheck and keeping cool during volatile markets are examples of things we should do. Splurging on a trip to Europe and selling stocks to “wait out” the downside volatility might be examples of things we’d prefer to do.

For many savers and investors, there is a constant tension between these two, even though we know that the clearest path to long-term success is saving more, spending less, and investing prudently. Much like losing weight, the formula for success is fundamentally simple – but the execution and follow-through can be painstakingly hard.

The fundamental question, then, is: what can we do to shift our behavior? What can we do to form better, lasting habits that lead to long-term financial success?

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When interest rates spiked in early 2018, income related investments such as Real Estate Investment Trusts (REITs) experienced a sell off. The FTSE NAREIT Equity REIT Index returned a negative 8.2% in the first quarter of 2018.¹ Income producing investments will frequently experience a sell-off in the face of a sudden spike in interest rates. Does this mean that you should not own REITS when interest rates increase? [+] Read More

Sell in May and Go Away?

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With the month of May approaching, it’s the time of year when we’re reminded of the old Wall Street saying, “sell in May and go away.” In theory, this suggests that an investor can sell out of the stock market on May 1st and get back into the market on November 1st to avoid the months where equity returns are typically depressed. While the saying “sell in May and go away” may be catchy, is it actually sound investment advice? Over the 50 years prior to 2016, during the 6-month period from May 1st through October 31st, U.S. stocks returned an average of 2.68%, while the 6-month period of November 1st through April 30th, U.S. stocks returned an average of 8.08%.[1] [+] Read More

How Does Loss Aversion Affect Your Investment Goals?

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Many readers have probably heard the axiom that investors “loathe losses about twice as much as they enjoy gains.” This notion that losses loom larger than gains is a behavioral finance idea known as “loss aversion,” and it’s been around since 1979 when two economists, Kahneman Tversky, formalized the idea in a paper called Prospect Theory. To give you an idea of just how widely accepted the idea of loss aversion is, Prospect Theory is the most cited paper in all of economics and the third most cited paper in psychology. [+] Read More

What Investors Need to Know About the Disposition Effect

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Part of being an astute investor involves hours of analyzing the capital markets, actively researching the companies and strategies you invest in, and staying up to speed on current events. That’s plenty of work on its own. But there is another aspect to smart investing that generally receives less attention but is arguably equally important. It involves studying ourselves – our behaviors and tendencies as investors, how and why we make investment decisions, and how those decisions may impact our returns over time. Most of this research falls within the field of Behavioral Finance, which challenges the assumption that “individuals act rationally and consider all available information in the decision-making process.”1 Investors rarely do those things, and that’s why studying behavioral finance can be so beneficial. The general thinking is that the more we understand the decision-making process, the better equipped we can be to help investors avoid common mistakes while simultaneously establishing guidelines for a disciplined investment process. [+] Read More

Investor Psychology: Why You May Not Be Your Own Best Financial Planner

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Dr. Meir Statman is a professor of finance (with a focus on behavioral finance) at Santa Clara University. You might say he is a foremost expert on how emotions can affect financial decision-making for managers and investors. His most recent book, “Finance for Normal People: How Investors and Markets Behave,” is pretty much a dead giveaway for where his life’s work is focused. So, when Dr. Statman pens an article in the Wall St. Journal titled, “How Emotions Get in the Way of Smart Investing,” it is probably worth a close look. Indeed, the relationship between human emotions and investing is a complicated one – and it’s one that many experts would agree is at odds. Few would disagree with this general idea: investors who can remove emotion from the investing equation have a better chance of doing well over time versus those who cannot. As Warren Buffet succinctly puts it, “it’s an easy game if you can control your emotions.” [+] Read More