James Zahansky, AWMA®
Principal/Managing Partner, Investment Advisor & Chief Goals Strategist
Personal or widespread events that cause anxiety or panic often lead people to make poor financial decisions. The volatility of the last two years is no exception. As we head into 2022, much uncertainty remains. But the good news is, you can control the way you respond in order to set yourself up for better financial health in the year ahead.
At Weiss, Hale & Zahansky Strategic Wealth Advisors, we share a belief expressed by the notable financial planner Carl Richards, author of “The Behavior Gap.” In his book Richards writes, “It turns out my job was not to find great investments, but to help create great investors.”
There’s actually a framework that Richards has outlined in his book to explain how people’s emotions interact with their actions when it comes to financial decisions. Understanding this process can help you to take control of it, and you’ll be a better investor as a result.
Understanding the Behavior Gap
From increasing our budget mindfulness to taking a steadier approach to investing, Richards has drawn attention to the way our unexamined behaviors and emotions can be our detriment when it comes to living a happy and financially sound life. He’s labelled this phenomenon “the behavior gap.”
The behavior gap refers to the difference between a smart financial decision versus what we actually decide to do. Many people miss out on higher returns because of emotionally driven decisions, creating a gap between their lower returns and what they could have earned.
4 Common Emotions that Can Create a Behavior Gap
- Excitement when stocks are high.
Whether in a bull market or witnessing the hype from a product release, many investors may feel tempted to increase their risks or attempt to gain from emerging investments when stocks are high. This can lead to constant readjustment of portfolios as the market itself experiences upswings. An investor who follows such patterns is likely to do the same with declines and may end up always trying (and often failing) to time the market.
- Fear when stocks are low.
As a response to the coronavirus, the market has seen losses as many investors feel the need to choose more secure investments and avoid uncertain or seemingly unsafe investments. When stocks are low, a common response may be to sell and effectively miss out on potential long-term gains.
- Engagement in the search for "alpha."
People yearn to make money and take action to do so. Throughout our lives, this emotional desire is likely a constant one. As such, many seek the help of a financial advisor to procure above-average returns, otherwise known as “alpha.”1 However, in this search for “alpha,” our humanness - our emotions and our behaviors - may lead us astray.
Ironically, studies done by DALBAR (the nation's leading financial services market research firm) have calculated the average investment return as compared to investor returns and have shown that investor returns are lower.1 This is because investor behaviors often dilute the possible return on any given investment by switching investments too frequently in search of the next alpha. The underlying emotional desire and pursuit of money is exactly the recipe for unwise behaviors in response to emotions - but only if left unchecked.
- Short-term anxiety and focus.
As humans, viewing aspects of our lives through the lenses of current circumstances is normal. One emotional response to any event, however, is letting the moment consume us, especially if faced with grave consequences - from our personal health being compromised to the loss of loved ones. Many may find it difficult in these times to both think long-term and to remember logic. However, making a rash decision can inhibit the long-term benefit that comes from maintaining a balanced perspective without reactionary behavior.
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How to Lessen the Behavior Gap for Your Financial Health
At any given point, the market can go up, down or it can remain the same. While market forces are out of our control, one thing we can control is how we handle our financial strategy.
Take the effects of the pandemic, for example. In the past, the market has recovered in response to epidemics with an average of 17.17 percent over time. While no two situations are alike, remembering the likelihood of recovery over time - and the market’s nearly inevitable up-and-down movement - can provide a more logical angle to calm the nerves.
If you’re experiencing financial anxiety in response to the pandemic, current events, or other forces, take a breath and also remember the potential for long-term gains. Don’t be a victim of the behavior gap in 2022. Instead, start the year off with a strong strategy and hold steady with that strategy in the weeks, months and years ahead. Doing so could make 2022 the most financially impactful year for you yet.
We can help you to build a strategy that will allow you to Plan Well, Invest. Well and Live Well in 2022 and beyond. Learn more and see how to get started.
Presented by Principal/Managing Partner James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.