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INVESTOR BEHAVIOR




Source: Created by Raymond James using Ibbotson Presentation Materials, © 2009 Morningstar, Inc.
All...
Seeing Is Not Believing


               Which gray circle is bigger?                                Which gray bar is lon...
Rational Minds Can Act Irrationally


               They are the same size.                                     They are ...
The Efficient-Market Theory


            Security prices efficiently incorporate all public information.
            They...
Patterns of Investor Irrationality


            Overconfidence
            Hindsight Bias
            Short-Term Focus
  ...
Overconfidence


            Definition
             Rating oneself as above average when it comes to selecting investment...
Overconfidence: False Perception
        Historical Performance of Emerging-Markets Stocks 2003 – 2008


  80% Return




...
Hindsight Bias


             Definition
             Believing that unpredictable past events, in retrospect, were obviou...
Hindsight Bias: Technology and Real Estate Bubbles
         An Examination of Technology Stocks and Home Values
          ...
Short-Term Focus


             Definition
             Inappropriately focusing on short-term risk versus long-term risk
...
Short-Term Focus: Avoiding Potential Near-Term Losses
         Choice of Asset Allocation After Examining Different Return...
Short-Term Focus: Coping with Near-Term Fluctuations
        Probability of Losing Money in the Market 1989 – 2008


  50%...
Regret


             Definition
             Having illogical feelings of guilt because of a poor outcome


             ...
Regret: Action Versus Inaction
        Analyzing Various Types of Regret


   $50k

                                      ...
Mental Accounting


             Definition
             Mentally compartmentalizing investments while ignoring the aggreg...
Mental Accounting: Sum of the Parts
        Risk and Return Characteristics 1970 – 2008




                              ...
Hot-Hand Fallacy


                Definition
                Perceiving trends where none exist and consequently taking a...
Hot-Hand Fallacy: Asset-Class Winners and Losers
        Annual Performance of Various Asset Classes 1994 – 2008
         ...
Hot-Hand Fallacy: Chasing Fund Performance
        Wealth Versus Cash Flows 1999 – 2008

                                 ...
Summary



            Investor misconceptions can be dangerous
            They need to be identified early and countered...
Disclosures


             Investors should carefully consider the investment objectives, risks, charges
             and ...
Disclosures (continued)

            There is an inverse relationship between interest rate movements and bond prices.
   ...
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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 Security prices efficiently incorporate all public information. They reflect their true investment value at all times. Asset allocation relies on market efficiency and rational investor behavior. However, investors do not always behave rationally. 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 Overconfidence Hindsight Bias Short-Term Focus Regret Mental Accounting Hot-Hand Fallacy 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  6. 6. Overconfidence Definition Rating oneself as above average when it comes to selecting investments Implications Miscalculating the probability of good outcomes Focusing on the potential upside of investments De-emphasizing the potential downside of investments 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 56.3% 40 39.8% 34.5% 32.6% 26.0% 20 0 -20 -40 -53.2% -60 2003 2004 2005 2006 2007 2008 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 Definition Believing that unpredictable past events, in retrospect, were obvious and predictable Implications Feelings of anger and regret Failure to avoid what appears to have been foreseeable Overconfidence 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 Technology Bubble Real Estate Bubble* $2,000 $300 1,000 $201 200 $367 100 100 1992 1994 1996 1998 2000 2002 1991 1995 1999 2003 2007 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 Definition Inappropriately focusing on short-term risk versus long-term risk Implications Many investors talk long term but act short term Overly sensitive to interim volatility regardless of time horizon May tend to behave as though their time horizon is far shorter than it truly is 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, When shown a distribution of 30-year returns, investors allocated 40% to stocks. investors allocated 90% to stocks. • Stocks 40% • Stocks 90% • Bonds 60% 10% • Bonds 10% 40% 60% 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.
  12. 12. Short-Term Focus: Coping with Near-Term Fluctuations Probability of Losing Money in the Market 1989 – 2008 50% Probability 46% 40 37% 30 30% 25% 20 10 0 Daily 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.
  13. 13. Regret Definition Having illogical feelings of guilt because of a poor outcome Implications Investors’ future investment decisions might be affected Can cause investors to become more risk averse/risk tolerant These individuals may blame advisors for perceived mistakes 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 $50k $44,410 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. 10 9 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan 07 08 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 Definition Mentally compartmentalizing investments while ignoring the aggregate portfolio Implications Investors tend to disaggregate a diversified portfolio Risk and return components viewed in a vacuum Leads to heightened concern about the riskiness of a component of a portfolio 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% International Large Stocks Stocks Return: 9.5% Risk: 11.6% Return: 9.7% Risk: 18.2% Risk: 23.2% Cash Small Stocks Return: 5.8% Return: 11.7% Risk: 2.9% Risk: 23.8% Bonds Return: 9.3% Risk: 11.4% 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 Definition Perceiving trends where none exist and consequently taking action on this faulty observation Implications Investors desire to invest in last year’s winners • Favoring a “hot” money manager or asset class Skill is inferred from a random pattern of chance Can lead to erroneous assumptions and predictions 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 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Highest 8.1% 37.6 23.0 33.4 28.6 29.8 21.5 22.8 17.8 60.7 20.7 14.0 26.9 11.6 25.9 Return IS LS LS LS LS SS LTGB SS LTGB SS IS IS IS IS LTGB 3.9 34.5 17.6 22.8 20.3 27.3 5.9 3.8 1.6 39.2 18.4 7.8 16.2 9.9 1.6 TB SS SS SS IS IS TB TB TB IS SS LTGB SS LTGB TB 3.1 31.7 6.4 15.9 13.1 21.0 -3.6 3.7 -13.3 28.7 10.9 5.7 15.8 5.5 -36.7 SS LTGB IS LTGB LTGB LS SS LTGB SS LS LS SS LS LS SS 1.3 11.6 5.2 5.3 4.9 4.7 -9.1 -11.9 -15.7 1.4 8.5 4.9 4.8 4.7 -37.0 LS IS TB TB TB TB LS LS IS LTGB LTGB LS TB TB LS -7.8 5.6 -0.9 2.1 -7.3 -9.0 -14.0 -21.2 -22.1 1.0 1.2 3.0 1.2 -5.2 -43.1 LTGB TB LTGB IS SS LTGB IS IS LS TB TB TB LTGB SS IS Lowest Return Small Stocks Large Stocks International Stocks Long-Term Government Bonds Treasury Bills (SS) (LS) (IS) (LTGB) (TB) 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.
  19. 19. Hot-Hand Fallacy: Chasing Fund Performance Wealth Versus Cash Flows 1999 – 2008 $1,600m $30k • Growth of $10,000 10-year Fund Total Return = -0.50% • Cash Flows 10-year Average Investor Return = -12.55% 1,400 25 1,200 1,000 20 800 600 15 400 10 200 0 5 -200 -400 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 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 Investor misconceptions can be dangerous They need to be identified early and countered in an appropriate manner Markets and investing must be viewed in a rational and productive manner 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  21. 21. Disclosures 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. Investing in small-cap stocks generally involves greater risks and, therefore, may not be appropriate for every investor. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Asset allocation and diversification do not ensure a profit or guarantee against a loss. Continued on next slide 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
  22. 22. Disclosures (continued) 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. 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. 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. 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

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