Training To Invest: Asset Allocation Daily
- Russell Investments helps us understand investors’ motivation to buy (or sell) as a means of addressing pain points and obtaining gratification.
- Pimco lays out a conservative base case for investing in 2019.
- Thought For The Day: Investors must train themselves to adopt a long-term outlook against a proclivity to seek pleasure and avoid pain in the present.
“If one can potentially soften draw-downs, while also gaining exposure to a source of diversified returns, EM may become a much more attractive investment...Consequently, a minimum volatility strategy may help investors feel comfortable investing in a riskier asset class, while also helping them to remain invested...” (BlackRock)
Investing In Europe
“A smooth execution of Brexit requires a lot of improbable things to go right. A volatile outcome only needs a few likely things to go wrong. Bottom line: Our UK-based holdings are predominantly multi-national businesses with minimal domestic exposure.” (Invesco US)
“We expect volatility and slowing profit growth to continue to impact investor appetite for equities in 2019. Therefore, we have a modest underweight to equities, with an emphasis on liquidity and high-quality, defensive sectors. We favor large caps over small caps, U.S. equities over European equities, and are modestly overweight Japanese equities given positive earnings, low leverage, and a still-supportive Bank of Japan.” (Pimco)
“For some investors the pain in the present of losing money during difficult periods for equity markets caused them to abandon their investment strategy. They likely picked up the phone and called you with a clear decision: sell now and move to cash…From the vantage point of the investor, however, she or he is simply buying cash by selling out of the market. To the investor, there's a perceived safety in leaving the market to avoid the immediate pain of volatility.” (Russell Investments)
Thought For The Day
In an article offering genuine insight, Russell Investments helps us understand investors’ motivation to buy (or sell) as a means of addressing pain points and obtaining gratification. By way of analogy, the asset manager explains why investors pulled over $120 billion out of mutual funds and ETFs in Q4-2018, as follows: Imagine after a long night out with the family, you run over a pothole, blow two tires, and wait for the tow truck in freezing weather while the kids are getting cranky in the back seat. Writes Russell:
The tow truck driver…states that he can put two new tires on your car right now for a cost of $600. How fast do you take out your credit card and pay to solve the problem? You are in pain... pain in the present, and you are willing to pay to get out of it fast.”
The analogy isn’t perfect because staying the course isn’t an option here, only finding a cheaper tire change is, but the story does indeed explain the principle underlying people’s decision making, which frequently revolves around the attainment of pleasure and avoidance of pain. In investing terms, the former could include buying stocks in a rising market, including stocks offering “bragging rights,” whereas the latter includes going to cash to avoid any further pain. That is to say, both involve a short-term view.
Like Russell Investments, which used the flat-tire story, I would reinforce these behavioral tenets with an analogy outside of investing: eating and drinking. How many people in our affluent society, eat and drink out of real need, to strengthen our bodies? Vanishingly few, of course. Indeed, some commonplace food items serve as vehicles to pump in the pleasure alone, void of any nutritional benefit, for example soft drinks.
My point is not to chastise readers for their health habits; I’ve been known to indulge too. Rather, it’s to demonstrate that, like the stranded passengers paying highway-robbery fees, people are highly pleasure-seeking and pain-avoidant, and this leads to bad results, be that in the realm of your health or your finances. When those bad results kick in – such as selling stocks amidst Q4 lows, do you think that people learn the lessons and reform their behavior? I’d say it’s likelier they repeat those behaviors to assuage their anguish and frustration, currently by chasing newly rebounding stock returns.
There’s only one solution to this problem and it is to train yourself to adopt a long-term outlook in your investing behavior, such that you take pleasure in gaining long-term benefit and are willing to wait at least a decade to see it, and it pains you to make impulsive short-term decisions.
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