1. Portfolio
Perspectives
August 2012
Understanding the Emotions of Investing
University and member of the Loring Ward Investment Com-
mittee, said this about confirmation bias: “Investors who believe
By Joni Clark, CFA, CFP® that they can pick winning stocks are regularly oblivious to their
Chief Investment Officer, Loring Ward losing record, recording wins as evidence confirming their stock-pick-
ing skills but neglecting to record losses as disconfirming evidence.”
Hindsight Bias is the belief that a past event was more predict-
“The investor’s chief problem — and even his worst enemy — is likely able than when the event took place, or “I knew it all along.”
to be himself.” Sports fans know this as “Monday Morning Quarterbacking,”
— Benjamin Graham, The Intelligent Investor, 1949 as it is always easy on Monday to see exactly what decisions the
football coach should have made in Sunday’s game. From an
Why do so many investors make decisions based upon emotional
investing standpoint, this bias can lead investors to be overly
reactions to short-term events?
confident that they possess superior investing abilities.
One possible answer: Because we’re human. It’s normal to feel
Many investors today are fatigued by the endless gloomy news and
anxiety during economic downturns or market turmoil, but acting
market volatility — and as a result they succumb to these emo-
upon those anxieties can lead to imprudent investment decisions.
tional biases that prevent them from sticking to a well-thought-out
The key is finding the balance between emotion and reason.
investment plan.
An emerging field of science known as behavioral finance attempts
It is important to recognize that any investment, no matter how
to answer the questions of how psychology impacts our decisions
conservative, is subject to risks, and that some investors may find
about money and has attracted significant attention in the academic
themselves substituting one form of risk for another.
community. The Nobel Prize in Economics in 2002 was awarded
to Daniel Kahneman for his work in this field. Some of the research Stuffing cash in your mattress, for instance, may seem pretty
in behavioral finance deals with cognitive errors or biases that all of prudent, but you’re out of luck if your house burns to the ground.
us tend to make, especially in times of stress. Here are a couple of Money market funds have provided a measure of stability, but will
examples, specifically noting how they apply to investing: generally fail to keep pace with inflation, meaning that you may
need to decrease your spending so your money can last throughout
Confirmation Bias refers to the tendency of people to look
your retirement. Likewise, some pundits tout gold as a safe com-
for information that attempts to support their beliefs. Meir
modity, but gold and all other precious metals have experienced
Statman, Glenn Klimek Professor of Finance at Santa Clara
dramatic price fluctuations throughout history.

2. Portfolio Perspectives
Achieving your long-term financial goals means accepting the financial decisions, the more likely we are to be able to balance
trade-off between risk and return of different investment asset those emotions with reason.
classes, and combining those asset classes to manage risk through Our continued message of “stay the course” and “tune out the
diversification. noise” may feel boring or outdated, but may be an appropriate
When the markets are unsteady, investing requires discipline and choice for long-term investors with a prudent, diversified invest-
patience in order to overcome our emotional tendencies. It’s ment portfolio.
certainly easy to give in to the temptation to make major changes An asset class investing philosophy isn’t flashy, and it’s not always
to your asset allocation every time the market slumps or soars. popular in some quarters, but it has helped many investors over the
Likewise, it’s tough to stand firm when the herd is stampeding this long haul. We strongly believe it will remain an appropriate choice
way and that, chasing after the latest hot fad. The more we can well into the future.
learn about how our emotions can get in the way of making wise
Implementing an Asset Class Investing strategy cannot guarantee a gain or protect against a loss.
Past performance does not guarantee future results and the principal value of an investment will fluctuate so that an investor’s shares, when
redeemed, may be worth more or less than their original cost. Stock investing involves risks, including increased volatility (up and down move-
ment in the value of your assets) and loss of principal.
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Commission. Securities transactions may be offered through Loring Ward Securities Inc., an affiliate, member FINRA/SIPC. 12-361 (Exp 8/14)