Investor Behavior

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Investor Behavior

  1. 1. INVESTOR BEHAVIOR Source: Created by Raymond James using Ibbotson Presentation Materials, © 2009 Morningstar, Inc. All rights reserved. Used with permission.
  2. 2. Seeing Is Not Believing Which gray circle is bigger? Which gray bar is longer? Are the gray horizontal lines parallel? This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  3. 3. Rational Minds Can Act Irrationally They are the same size. They are the same size. The horizontal lines are parallel. This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  4. 4. The Efficient-Market Theory <ul><li>Security prices efficiently incorporate all public information. </li></ul><ul><li>They reflect their true investment value at all times. </li></ul><ul><li>Asset allocation relies on market efficiency and rational investor behavior. </li></ul><ul><li>However, investors do not always behave rationally. </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  5. 5. Patterns of Investor Irrationality <ul><li>Overconfidence </li></ul><ul><li>Hindsight Bias </li></ul><ul><li>Short-Term Focus </li></ul><ul><li>Regret </li></ul><ul><li>Mental Accounting </li></ul><ul><li>Hot-Hand Fallacy </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  6. 6. Overconfidence <ul><li>Definition </li></ul><ul><li>Rating oneself as above average when it comes to selecting investments </li></ul><ul><li>Implications </li></ul><ul><li>Miscalculating the probability of good outcomes </li></ul><ul><li>Focusing on the potential upside of investments </li></ul><ul><li>De-emphasizing the potential downside of investments </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  7. 7. Overconfidence: False Perception Historical Performance of Emerging-Markets Stocks 2003 – 2008 80% Return 60 20 0 - 2 0 - 6 0 40 2003 2004 2005 2006 2007 2008 56.3% 26.0% 34.5% 32.6% 39.8% - 4 0 -53.2% Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  8. 8. Hindsight Bias <ul><li>Definition </li></ul><ul><li>Believing that unpredictable past events, in retrospect, were obvious and predictable </li></ul><ul><li>Implications </li></ul><ul><li>Feelings of anger and regret </li></ul><ul><li>Failure to avoid what appears to have been foreseeable </li></ul><ul><li>Overconfidence </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  9. 9. Hindsight Bias: Technology and Real Estate Bubbles An Examination of Technology Stocks and Home Values $367 $201 $2,000 1,000 100 1992 1991 1994 1996 1998 2000 2002 100 200 $300 1995 1999 2003 2007 Technology Bubble Real Estate Bubble* Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • *Data available through November 2008. This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  10. 10. Short-Term Focus <ul><li>Definition </li></ul><ul><li>Inappropriately focusing on short-term risk versus long-term risk </li></ul><ul><li>Implications </li></ul><ul><li>Many investors talk long term but act short term </li></ul><ul><li>Overly sensitive to interim volatility regardless of time horizon </li></ul><ul><li>May tend to behave as though their time horizon is far shorter than it truly is </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  11. 11. Short-Term Focus: Avoiding Potential Near-Term Losses Choice of Asset Allocation After Examining Different Return Distributions When shown a distribution of one-year returns , investors allocated 40% to stocks. When shown a distribution of 30-year returns , investors allocated 90% to stocks. • Stocks 40% • Bonds 60% 40% 60% 10% 90% Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Source: Shlomo Benartzi and Richard H. Thaler, “Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments,” June 1998. This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission. • Stocks 90% • Bonds 10%
  12. 12. Short-Term Focus: Coping with Near-Term Fluctuations Probability of Losing Money in the Market 1989 – 2008 0 Daily 40 30 20 10 Monthly Quarterly Annually Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission. 50% Probability 46% 37% 30% 25%
  13. 13. Regret <ul><li>Definition </li></ul><ul><li>Having illogical feelings of guilt because of a poor outcome </li></ul><ul><li>Implications </li></ul><ul><li>Investors’ future investment decisions might be affected </li></ul><ul><li>Can cause investors to become more risk averse/risk tolerant </li></ul><ul><li>These individuals may blame advisors for perceived mistakes </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  14. 14. Regret: Action Versus Inaction Analyzing Various Types of Regret 10 9 $50k $44,410 Jan 07 Mar May Jul Sep Nov Jan 08 Mar May Jul Sep Investor A purchased shares of Company ABC. Investor A sold shares of Company ABC. Investor B considered purchasing shares of Company ABC, but did not. Nov Jan 09 Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  15. 15. Mental Accounting <ul><li>Definition </li></ul><ul><li>Mentally compartmentalizing investments while ignoring the aggregate portfolio </li></ul><ul><li>Implications </li></ul><ul><li>Investors tend to disaggregate a diversified portfolio </li></ul><ul><li>Risk and return components viewed in a vacuum </li></ul><ul><li>Leads to heightened concern about the riskiness of a component of a portfolio </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  16. 16. Mental Accounting: Sum of the Parts Risk and Return Characteristics 1970 – 2008 Total Portfolio Return: 9.9% Risk: 11.6% Large Stocks Return: 9.5% Risk: 18.2% Small Stocks Return: 11.7% Risk: 23.8% Bonds Return: 9.3% Risk: 11.4% Cash Return: 5.8% Risk: 2.9% International Stocks Return: 9.7% Risk: 23.2% Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  17. 17. Hot-Hand Fallacy <ul><li>Definition </li></ul><ul><li>Perceiving trends where none exist and consequently taking action on this faulty observation </li></ul><ul><li>Implications </li></ul><ul><li>Investors desire to invest in last year’s winners </li></ul><ul><ul><li>Favoring a “hot” money manager or asset class </li></ul></ul><ul><li>Skill is inferred from a random pattern of chance </li></ul><ul><li>Can lead to erroneous assumptions and predictions </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  18. 18. Hot-Hand Fallacy: Asset-Class Winners and Losers Annual Performance of Various Asset Classes 1994 – 2008 2007 11.6 IS 9.9 LTGB 4.7 TB 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 8.1% IS 21.5 LTGB 17.8 LTGB 20.7 IS 14.0 IS 26.9 IS 3.9 TB 20.3 IS 27.3 IS 5.9 TB 3.8 TB 1.6 TB 39.2 IS 7.8 LTGB 31.7 LTGB 6.4 IS 15.9 LTGB 13.1 LTGB 3.7 LTGB 1 1.6 IS 5.2 TB 5.3 TB 4.9 TB 4.7 TB - 15.7 IS 1.4 LTGB 8.5 LTGB 4.8 TB - 7.8 LTGB 5.6 TB - 0.9 LTGB 2.1 IS - 9.0 LTGB - 14.0 IS - 21.2 IS 1.0 TB 1.2 TB 3.0 TB 1.2 LTGB Highest Return Lowest Return 2008 25.9 LTGB 1.6 TB -43.1 IS Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission. -5.2 SS 29.8 SS 22.8 SS 60.7 SS 34.5 SS 17.6 SS 22.8 SS 18.4 SS 16.2 SS 3.1 SS - 3.6 SS - 13.3 SS 5.7 SS - 7.3 SS -36.7 SS 5.5 LS 37.6 LS 23.0 LS 33.4 LS 28.6 LS 21.0 LS 28.7 LS 10.9 LS 15.8 LS 1.3 LS - 9.1 LS - 11.9 LS 4.9 LS - 22.1 LS -37.0 LS Large Stocks (LS) Small Stocks (SS) International Stocks (IS) Long-Term Government Bonds (LTGB) Treasury Bills (TB)
  19. 19. Hot-Hand Fallacy: Chasing Fund Performance Wealth Versus Cash Flows 1999 – 2008 • Growth of $10,000 • Cash Flows 10-year Fund Total Return = -0.50% 10-year Average Investor Return = -12.55% 0 5 10 15 20 25 $30k -400 0 400 600 800 1,000 1,200 1,400 $1,600m -200 200 2008 1999 2000 2001 2002 2003 2004 2005 2006 2007 Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  20. 20. Summary <ul><li>Investor misconceptions can be dangerous </li></ul><ul><li>They need to be identified early and countered in an appropriate manner </li></ul><ul><li>Markets and investing must be viewed in a rational and productive manner </li></ul>3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  21. 21. <ul><li>Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectuses contain this and other information about mutual funds. The prospectuses are available from our office and should be read carefully before investing. </li></ul><ul><li>Investing in small-cap stocks generally involves greater risks and, therefore, may not be appropriate for every investor. </li></ul><ul><li>International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. </li></ul><ul><li>Investing in emerging markets can be riskier than investing in well-established foreign markets. </li></ul><ul><li>Asset allocation and diversification do not ensure a profit or guarantee against a loss. </li></ul>March 1, 2009 • Source: Created by Raymond James using Ibbotson Presentation Materials © 2009 Morningstar, Inc. All rights reserved. Used with permission. 2009 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC • 2009 Raymond James Financial Services, Inc., member FINRA/SIPC Continued on next slide Disclosures
  22. 22. <ul><li>There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. </li></ul><ul><li>Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one's entire investment. </li></ul><ul><li>U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. </li></ul>March 1, 2009 • Source: Created by Raymond James using Ibbotson Presentation Materials © 2009 Morningstar, Inc. All rights reserved. Used with permission. 2009 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC • 2009 Raymond James Financial Services, Inc., member FINRA/SIPC Disclosures (continued)

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