Contact

Cryptocurrency: What’s It All About?

Have you caught cryptocurrency fever, or are you at least wondering what it’s all about? Odds are, you hadn’t even heard the term until recently. Now, it seems as if everybody and their cousin are getting in on it.

Psychologists have assigned a term to the angst you might be feeling in the heat of the moment. It’s called “FoMO” or Fear of Missing Out. Education is the best first step toward facing FoMo and making informed financial choices that are right for you. So before you make any leaps, let’s take a closer look.

What is cryptocurrency?

Crytpocurrency is essentially a kind of money – or currency. Thanks to electronic security – or encryption – it exists in a presumably secure, sound and limited supply. Pair the “encryption” with the “currency,” and you’ve got a new kind of digital asset, or electronic exchange.

Well, sort of new. Cryptocurrency was introduced in 2009, supposedly by a fellow named Satoshi Nakamoto. His Wikipedia entry suggests he may not actually be who he says he is, but minor mysteries aside, he (or possibly “they”) is credited with designing and implementing

bitcoin as the first and most familiar cryptocurrency. Ethereum is currently its second-closest competitor, with plenty of others vying for space as well (more than 1,300 as of early December 2017), and plenty more likely to come.

Unlike a dollar bill or your pocket change, cryptocurrency exists strictly as computer code. You can’t touch it or feel it. You can’t flip it, heads or tails. But increasingly, holders are receiving, saving and spending their cryptocurrency in ways that emulate the things you can do with “regular” money.

How does cryptocurrency differ from “regular” money?

In comparing cryptocurrency to regulated fiat currency – or most countries’ legal tender – there are a few observations of note.

First, since neither fiat nor cryptocurrency are still directly connected to the value of an underlying commodity like gold or silver, both must have another way to maintain their spending power in the face of inflation.

For legal tender, most countries’ central banks keep their currency’s spending power relatively stable. For cryptocurrency, there is no central bank, or any other centralized repository or regulator. Its stability is essentially backed by the strength of its underlying ledger, or blockchain, where balances and transactions are verified and then publicly reported.

The notion of limited supply factors in as well. Obviously, if everyone had an endless supply of money, it would cease to have any value to anyone. That’s why central banks (such as the U.S. Federal Reserve, the Bank of Canada, and the Bank of England) are in charge of stabilizing the value of their nation’s legal tender, regularly seeking to limit supply without strangling demand.

While cryptocurrency fans offer explanations for how its supply and demand will be managed, it’s not yet known how effective the processes will be in sustaining this delicate balance, especially when exuberance- or panic-driven runs might outpace otherwise orderly procedures. (If you’re technically inclined and you’d like to take a deep dive into how the financial technology operates, here’s one source to start with.)

Why would anyone want to use cryptocurrency instead of legal tender?

For anyone who may not be a big fan of government oversight, the processes are essentially driven “by and for the people” as direct peer-to-peer exchanges with no central authorities in charge. At least in theory, this is supposed to allow the currency to flow more freely, with less regulation, restriction, taxation, fee extraction, limitations and similar machinations. Moreover, cryptocurrency transactions are anonymous.

If the world were filled with only good, honest people, cryptocurrency and its related technologies could represent a better, more “boundary-less” system for more freely doing business with one another, with fewer of the hassles associated with international commerce.

Unfortunately, in real life, this sort of unchecked exchange can also be used for all sorts of mischief – like dodging taxes, laundering money or funding terrorism, to name a few.

In short, cryptocurrency, blockchain technology, and/or their next-generations could evolve into universal tools with far wider application. Indeed, such explorations already are under way. In December 2017, Vanguard announced collaborative efforts to harness blockchain technology for improved index data sharing.

That said, many equally promising prospects have ended up discarded in the dustbin of interesting ideas that might have been. Time will tell which of the many possibilities that might happen actually do.

Even if I don’t plan to use cryptocurrency, should I hold some as an investment?

If you do jump in at this time, know you are more likely speculating than investing, with current pricing resembling a fast-forming bubble destined for collapse.

Bubble or not, there are at least two compelling reasons you may want to sit this one out for now. First, there are a lot of risks inherent to the cryptocurrency craze. Second, cryptocurrency simply doesn’t fit into our principles of evidence-based investing … at least not yet.

Let’s take a look at the risks.

 Regulatory Risks – First, there’s the very real possibility that governments may decide to pile mountains of regulatory road blocks in front of this currently free-wheeling freight train. Some countries have already banned cryptocurrency. Others may require extra reporting or onerous taxes. These and other regulations could severely impact the liquidity and value of your coinage.

 Security Risks – There’s also the ever-present threat of being pickpocketed by cyberthieves. It’s already happened several times, with millions of dollars of value swiped into thin air. Granted, the same thing can happen to your legal tender, but there is typically far more government protection and insurance coverage in place for your regulated accounts.

 Technological Risks – As we touched on above, a system that was working pretty well in its development days has been facing some serious scaling challenges. As demand races ahead of supply, the human, technical and electric capital required to keep everything humming along is under stress. One recent post estimated that if bitcoin technology alone continues to grow apace, by February 2020, it will suck away more electricity than the entire world uses today.

That’s a lot of potential buzzkill for your happily-ever-after bitcoin holdings, and one reason you might want to think twice before you pile your life’s savings into them.

Then again, every investment carries some risk. If there were no risk, there’d be no expected return. That’s why we also need to address what evidence-based investing looks like. It begins with how investors (versus speculators) evaluate the markets.

What’s a bitcoin worth? A dollar? $100? $100,000? The answer to that has been one of the most volatile bouncing balls the market has seen since tulip mania in the 1600s.

In his ETF.com column “Bitcoin & Its Risks,” financial author Larry Swedroe summarizes how market valuations occur. “With stocks,” he says, “we can look at valuation metrics, like earnings yield. With bonds, we can use the current yield-to-maturity. And with assets like reinsurance or lending … we have historical evidence to make the appropriate estimates.”

You can’t do any of these things with cryptocurrency. Swedroe explains: “There simply is no tangible relationship between any economic or financial parameters and bitcoin prices.” Instead, there are several ways buying cryptocurrency differs from investing:

Cryptocurrency simply doesn’t yet synch well with these parameters. It does have a price, but it can’t be effectively valued for planning purposes, especially amidst the extreme price swings we’re seeing of late.

What if I decide to buy some cryptocurrency anyway?

We get it. Even if it’s far more of a speculative than investment endeavor, you may still decide to give cryptocurrency a go, for fun or potential profit. If you do, here are some tips to consider:

Last but not least, good luck. Whether you win or lose a little or a lot with cryptocurrency – or you choose to only watch it from afar for now – we remain available to assist with your total wealth, come what may.

Reflections on a Happy Thanksgiving

What makes you happy? As we wish you and yours a Happy Thanksgiving, we’d like to take a moment to reflect on this timeless question.

You probably already realize that piles of possessions by themselves aren’t enough. But it may be less clear what does generate enduring happiness and how we, as your financial advsior, might be one of your core alliances for discovering it.

First, let’s define what we’re talking about. We are fond of this description by “The Happiness Advantage” author, popular TED Talk presenter, and Harvard researcher Shawn Achor:

“Happiness … isn’t just about feeling good,
it’s about the joy we feel while striving after our potential.”

Such a simple statement, but it’s packed with profound insights.

Happiness isn’t about indulging in fleeting pleasures. In fact, it’s closer to the opposite of that. If you can only be happy once you’ve “scored,” you are limiting your joy to isolated incidents instead of weaving it into the fabric of your life.

You can still be happy, even when life isn’t all puppies and rainbows. Distinguishing enduring happiness from occasional pleasures frees us to enjoy even our most challenging experiences, and to savor them as among our fondest memories. It’s why we may willingly burn the midnight oil on a project of deep interest. Pay a personal trainer to push us harder than we’ve ever gone before. Volunteer our hearts and minds to others in need. Give birth.

Everyone has different sources of happiness, but the joy it can spread is universal. In a world that sometimes seems increasingly polarized, a greater appreciation for happiness might just bring us closer together. As Achor comments: “Joy makes us want to invest more deeply in the people around us. … It makes us want to learn more about our communities. It makes us want to be able to find ways of being able to make this a better external world for all of us.”

By coming together to focus on what sustains us – an optimistic outlook, value-driven action, meaningful relationships – therein we can find greater happiness. That’s what the evidence suggests, anyway. It is both our privilege and our joy to help you manage your money accordingly, this Thanksgiving and throughout the years ahead.

Again, we wish you a most Happy Thanksgiving!

 

The ABCs of Behavioral Biases (O-R)

So many financial behavioral biases, so little time! Today, let’s take a few minutes to cover our next batch of biases: overconfidence, pattern recognition and recency. If you would like to get caught up on our recent articles about behavioral biases, please click here to begin!

Overconfidence

What is it? No sooner do we recover from one debilitating bias, our brain can whipsaw us in an equal but opposite direction. For example, we’ve already seen how fear on the one hand and greed on the other can knock investors off course either way. Similarly, overconfidence is the flip side of loss aversion. Once we’ve got something, we don’t want to lose it and will overvalue it compared to its going rate. But when we are pursuing fame or fortune, or even going about our daily lives, we tend to be overconfident about our odds of success.

When is it helpful? In “Your Money & Your Brain,” Jason Zweig cites several sources that describe overconfidence in action and why it’s the norm rather than the exception in our lives. “How else could we ever get up the nerve to ask somebody out on a date, go on a job interview, or compete in a sport?” asks Zweig, and adds: “There is only one major group whose members do not consistently believe they are above average: people who are clinically depressed.”

When is it harmful? While overconfidence can be generally beneficial, it becomes dangerous when you’re investing. Interacting with a host of other biases (such as greed, confirmation bias and familiarity bias) overconfidence puffs up our belief that we can consistently beat the market by being smarter or luckier than average. In reality, when it’s you, betting against the trillions and trillions of other dollars at play in our global markets, it’s best to be brutally realistic about how to patiently participate in the market’s expected returns, instead of trying to go for broke – potentially literally.

Pattern Recognition

What is it? Is that a zebra, a cheetah or a light breeze moving through the grass? Since prehistoric times when our ancestors depended on getting the right answer, right away, evolution has been conditioning our brains to find and interpret patterns – or else. That’s why, our pattern-seeking impulses tend to treat even random events (like 10 coin flips, all heads) as if they’re orderly outcomes suggesting a predictive pattern. “Just as nature abhors a vacuum, people hate randomness,” says Zweig, as a result of our brain’s dopamine-induced “prediction addiction.”

When is it helpful? Had our ancestors failed at pattern recognition, we wouldn’t be here to speak of it, and we still make good use of it today. For example, we stop at red lights and go when they’re green. Is your spouse or partner giving you “that look”? You know just what it means before they’ve said a single word. And whether you enjoy a good jigsaw puzzle, Sudoku, or Rubik’s Cube, you’re giving your pattern recognition skills a healthy workout.

When is it harmful? Speaking of seeing red, Zweig recently published a fascinating piece on how simply presenting financial numbers in red instead of black can make investors more fearful and risk-averse. That’s a powerful illustration of how pattern recognition can influence us – even if the so-called pattern (red = danger) is a red herring. Is any given stream of breaking financial news a predictive pattern worth pursuing? Or is it simply a deceptive mirage? Given how hard it is to tell the difference (until hindsight reveals the truth), investors are best off ignoring the market’s many glittering distractions and focusing instead on their long-term goals.

Recency

What is it? Recency causes you to pay more attention to your most recent experiences, and to downplay the significance of long-term conditions. For example, in “Nudge,” Nobel laureate Richard Thaler and co-author Cass Sunstein observe: “If floods have not occurred in the immediate past, people who live on floodplains are far less likely to purchase insurance.” That’s recency, tricking people into ascribing more importance to the lack of recent flooding than to the bigger context of being located on a flood plain.

When is it helpful? In “Stumbling on Happiness,” Daniel Gilbert describes how we humans employ recency to accurately interpret otherwise ambiguous situations. Say, for example, someone says to you, “Don’t run into the bank!” Whether your most recent experience has been floating down a river or driving toward the commerce district helps you quickly decide whether to paddle harder or walk more carefully through the door.

When is it harmful? Of course buying high and selling low is exactly the opposite of investors’ actual aspirations. And yet, no matter how many times our capital markets have moved through their bear-and-bull cycles, recency causes droves of investors to stumble every time. By reacting to the most recent jolts instead of remaining positioned as planned for long-term expected growth, they end up piling into high-priced hot holdings and locking in losses by selling low during the downturns. They allow recency to get the better of them … and their most rational, evidence-based investment decisions.

We’re on the home stretch of our series on behavioral biases. Look for the rest of the alphabet soon.

The ABCs of Behavioral Biases (H-O)

There are so many investment-impacting behavioral biases, we could probably identify at least one for nearly every letter in the alphabet. Today, we’ll continue with the most significant ones by looking at: hindsight, loss aversion, mental accounting and outcome bias. After you have finished this article, please look back at our previous article in this series here.

Hindsight

What is it? In “Thinking, Fast and Slow,” Daniel Kahneman credits Baruch Fischhoff for demonstrating hindsight bias – the “I knew it all along” effect – when he was still a student. Kahneman describes hindsight bias as a “robust cognitive illusion” that causes us to believe our memory is correct when it is not. For example, say you expected a candidate to lose, but she ended up winning. When asked afterward how strongly you predicted the actual outcome, you’re likely to recall giving it higher odds than you originally did. This seems like something straight out of a science fiction novel, but it really does happen!

When is it helpful? Similar to blind spot bias (one of the first biases we covered) hindsight bias helps us assume a more comforting, upbeat outlook in life. As “Why Smart People Make Big Money Mistakes” authors Gary Belsky and Thomas Gilovich describe it, “We humans have developed sneaky habits to look back on ourselves in pride.” Sometimes, this causes no harm, and may even help us move past prior setbacks.

When is it harmful? Hindsight bias is hazardous to investors, since your best financial decisions come from realistic assessments of market risks and rewards. As Kahneman explains, hindsight bias “leads observers to assess the quality of a decision not by whether the process was sound but by whether its outcome was good or bad.” If a high-risk investment happens to outperform, but you conveniently forget how risky it truly was, you may load up on too much of it and not be so lucky moving forward. On the flip side, you may too quickly abandon an underperforming holding, deceiving yourself into dismissing it as a bad bet to begin with.

Loss Aversion

What is it? “Loss aversion” is a fancy way of saying we often fear losing more than we crave winning, which leads to some interesting results when balancing risks and rewards. For example, in “Stumbling on Happiness,” Daniel Gilbert describes: “[M]ost of us would refuse a bet that gives us an 85 percent chance of doubling our life savings and a 15 percent chance of losing it.” Even though the odds favor a big win, imagining that slight chance that you might go broke leads most people to decide it’s just not worth the risk.

When is it helpful? To cite one illustration of when loss aversion plays in your favor, consider the home and auto insurance you buy every year. It’s unlikely your house will burn to the ground, your car will be stolen, or an act of negligence will cost you your life’s savings in court. But loss aversion reminds us that unlikely does not mean impossible. It still makes good sense to protect against worst-case scenarios when we know the recovery would be very painful indeed.

When is it harmful? One way loss aversion plays against you is if you decide to sit in cash or bonds during bear markets – or even when all is well, but a correction feels overdue. The evidence demonstrates that you are expected to end up with higher long-term returns by at least staying put, if not bulking up on stocks when they are “cheap.” And yet, the potential for future loss can frighten us into abandoning our carefully planned course toward the likelihood of long-term returns.

Mental Accounting

What is it? If you’ve ever treated one dollar differently from another when assessing its worth, that’s mental accounting at play. For example, if you assume inherited money must be more responsibly managed than money you’ve won in a raffle, you’re engaging in mental accounting.

When is it helpful? In his early paper, “Mental Accounting Matters,” Richard Thaler (who is credited for having coined the term), describes how people use mental accounting “to keep trace of where their money is going, and to keep spending under control.” For example, say you set aside $250/month for a fun family outing. This does not actually obligate you to spend the money as planned or to stick to your budget. But by effectively assigning this function to that money, you’re better positioned to enjoy your leisure time, without overdoing it.

When is it harmful? While mental accounting can foster good saving and spending habits, it plays against you if you instead let it undermine your rational investing. Say, for example, you’re emotionally attached to a stock you inherited from a beloved aunt. You may be unwilling to unload it, even if reason dictates that you should. You’ve just mentally accounted your aunt’s bequest into a place that detracts from rather than contributes to your best financial interests.

Outcome Bias

What is it? Sometimes, good or bad outcomes are the result of good or bad decisions; other times (such as when you try to forecast future market movements), it’s just random luck. Outcome bias is when you mistake that luck as skill.

When is it helpful? This may be one bias that is never really helpful in the long run. If you’ve just experienced good or bad luck rather than made a smart or dumb decision, when wouldn’t you want to know the difference, so you can live and learn?

When is it harmful? As Kahneman describes in “Thinking, Fast and Slow,” outcome bias “makes it almost impossible to evaluate a decision properly – in terms of the beliefs that were reasonable when the decision was made.” It causes us to be overly critical of sound decisions if the results happen to disappoint. Conversely, it generates a “halo effect,” assigning undeserved credit “to irresponsible risk seekers …who took a crazy gamble and won.” In short, especially when it’s paired with hindsight bias, this is dangerous stuff in largely efficient markets. The more an individual happens to come out ahead on lucky bets, the more they may mistakenly believe there’s more than just luck at play.

You’re now more than halfway through our alphabetic series of behavioral biases. Look for our next piece soon.

New Associate “Focus On You”: RJ Dechow

Robert “RJ” Dechow

Clifton Strengths Finder Top 5 Strengths:

Context, Analytical, Relator, Responsibility, Harmony

What is your role at HHWM?

Intern Associate – working on major projects such as technology updates to the CRM, reorganizing file structure, marketing activities within the firms’ blog and social media, and learning about the financial planning industry.

What did you do before joining Hiley Hunt Wealth Management?

I had two previous jobs before coming to Hiley Hunt Wealth Management I worked as a host at First Watch restaurant and as a Financial Representative at Modern Woodman of America.

Where did you grow up?

Gretna, Nebraska

What are you studying?

I am a junior at the University of Nebraska at Omaha with a triple major in Business Finance, Banking & Financial Markets, and Investment Science & Portfolio Management.

What do you do for fun?

I play the Tuba in the concert band at UNO and the pep band at Hockey & Basketball games. I also enjoy cheering on my beloved Detroit Tigers and Nebraska Cornhuskers. I like to read Tom Clancy novels, non-fiction, and business books.

What’s one of the most memorable experiences you have had?

I had the chance to attend the Major League Baseball All Star game with my Dad back in 2012 – it was a great experience!

What do you want to be when you grow up?

A Certified Financial Planner practitioner!

 

Equifax Breach Commentary

While the Equifax security breach only recently became public knowledge on September 8, in many ways, it was a lifetime ago.

We were already on high alert for instances of identity theft. But the source, scope, and what seems like a justified feeling of betrayal associated with this particular breach have ushered in a new era of cybersecurity. There was before the Equifax breach; now there’s after.

What does “after” look like, and how can we help you navigate it? You’ve no doubt noticed a barrage of articles covering what has happened and what others suggest you should do about it. Unfortunately, there is no one-size-fits-all regimen, but here are some of the most frequently cited actions we’ve seen, along with our commentary on them:

Check your credit reports using annualcreditreport.com. Keeping an eye on your credit reports has long been a best practice, and should continue to be, today more than ever. Be sure to only use annualcreditreport.com. As the website says, it is the only provider authorized by Federal law to provide you with the free annual reports that already are rightfully yours. Also, so you can obtain a free credit report more than annually, consider staggering the three primary agencies’ reports, selecting one to review every four months.

Consider placing a fraud alert or a freeze on your credit. Deciding which (if either) of these actions makes sense for you depends on your personal circumstances. For example, if you’re frequently applying for credit, placing a freeze may be impractical. On the other hand, if you have been a victim of identity theft, an alert might not suffice. In this instance, it’s worth reading through the advantages and disadvantages before determining your next steps. We’re here for you as well, to serve as an additional sounding board.

Consider enrolling in a credit monitoring service. Equifax has offered to provide a year of free credit monitoring and identity theft protection via TrustedID Premier. We’ve seen mixed reviews on whether it makes sense to accept Equifax’s offer. First, there’s the whole trust issue raised by the recent breach. Plus, identity thieves have nearly endless patience, so one year of monitoring is only the beginning. That said, other independent services can be costly (especially if you’ve got an entire family to cover), and they may not ultimately offer much that you cannot do on your own if you so choose. It comes down to a cost/benefit analysis unique to you.

Regularly change the passwords and PINs on your financial accounts. Like regularly monitoring your credit reports, periodically changing your financial account login information has been and remains a best practice. Quarterly or at least twice a year makes good sense to us.

File your tax returns as early as you’re able. Filing early minimizes the opportunity for an identity thief to file a bogus return on your behalf.

We’ve seen other tips and pointers besides these, some of which may be advisable as well. To avoid informational overload, here are three guiding lights:

So, how can we help you moving forward? If you’d like to consult with us as you think through some of the points we’ve touched on above, we welcome the conversation. We also ask you to be responsive when we reach out to you with security-related questions or suggestions. For example, earlier this year, we produced a quick-reference and more detailed overview, “Avoiding Financial Scams and Identity Theft Slams,” filled with perennial information and best practices. We’d be delighted to share (or re-share) those materials with you.

As this wise educator observed in reflecting on the Equifax breach, “Security isn’t a product. It’s a process.” Just as sensible investing involves taking appropriate near-term steps in the context of an ongoing, personalized plan, so too do we find it increasingly imperative to respond to this and future cyberattacks with upfront planning, well-reasoned action and continued best practices. Let us know how else we can assist with that!

 

Celebrating Labor Day

The national holiday we celebrated on Monday is a good time for reflection on why we work and what we derive from it. The answer should be that it gives your life energy and meaning. If it doesn’t, you should change that.

Labor Day marks the unofficial end of summer. Summer trips wind down, students leave for college, football season gears up and we anticipate the cooler days of fall with enthusiasm. The long weekend is marked for rest and recreation as we ponder the meaning and significance of labor and work.

The Central Labor Union organized the first Labor Day in 1882. Aimed at promoting trade unions, the parades and festivals were designed to entertain workers and their families. Labor Day became a federal holiday in 1894, a welcome addition to fill the gap between Independence Day and Thanksgiving.

Work Matters. Most agree that meaningful work is a major component of human well-being. It does not matter whether the work is paid, volunteer or pro- bono, or whether you work at home to nurture a family. Work matters.

A human being without purpose is a lost soul. “A life well-lived” is the stuff of advertising, self-help books and the psychiatrist’s couch. The scientists at the Gallup organization have been exploring the subject since the mid-20th century. A not-so-startling finding: Our happiness and feelings of well-being are a function of liking what we do each day.

Love What You Do. As Tom Rath and Jim Harter explain in their book, Well Being: The Five Essential Elements, “…at a fundamental level, we all need something to do, and ideally something to look forward to, when we wake up each day. What you spend your day doing each day shapes your identity, whether you are a student, parent, volunteer, retiree or have a more conventional job.”

That makes sense. Yet only 20% gave a strong “yes” when Gallup researchers asked over and over, “Do you like what you do each day?”  If 80% are unhappy with daily activities, the rest of their life is likely to be out of whack. Certainly, financial well-being will suffer as will physical, social and community well-being.

Well-Being Matters. Ask someone what well-being means to them and most, guys especially, will focus on money and physical fitness. But if you are to successfully navigate life, then relationships and social connections, your sense of place, the fact that you are where you belong in terms of where you live, work and interact with friends and people, as well as your spiritual home, are all key components of well-being. In other words, career, financial, physical, social, and community well-being are part of a balanced continuum.

Defining Strength. When you reinforce your talent with knowledge and skill, you have strength. A talent is a naturally recurring pattern of thought, feeling or behavior productively applied. A skill is the ability to move through the fundamental steps of a task. Knowledge is what we know.

A strength, then, is a powerful, productive combination of talent, skill and knowledge. When you are doing anything from strength, you feel it, you know it, and you love it. Boredom and frustration have no place in your day.

If you want to recalibrate and infuse your life with new energy, a revitalized sense of purpose, and a sense of holistic well-being, read these two short, but powerful books.

One More Thought. Winifred Holtby (1898-1935) was an English novelist and journalist, best known for her novel South Riding. Her epitaph reads, “God give me work, till my life shall end, And life, till my work is done.” In the future, after you say grace at your Labor Day picnic, add Winifred’s prayer to your wishes and resolutions.

Happy Labor Day.

 

The ABCs of Behavioral Biases (A–F)

Welcome back to our “ABCs of Behavioral Biases.” Today, we’ll get started by introducing you to four self-inflicted biases that knock a number of investors off-course: anchoring, blind spot, confirmation and familiarity bias.

Anchoring Bias

What is it? Anchoring bias occurs when you fix on or “anchor” your decisions to a reference point, whether or not it’s a valid one.

When is it helpful? An anchor point can be helpful when it is relevant and contributes to good decision-making. For example, if you’ve set a 10 pm curfew for your son or daughter and it’s now 9:55 pm, your offspring would be wise to panic a bit, and step up the homeward pace.

When is it harmful? In investing, people often anchor on the price they paid when deciding whether to sell or hold a security: “I paid $11/share for this stock and now it’s only worth $9/share. I’ll hold off selling it until I’ve broken even.” This is an example of anchoring bias in disguise. Evidence-based investing informs us, the best time to sell a holding is when it’s no longer serving your ideal total portfolio, as prescribed by your investment plans. What you paid is irrelevant to that decision, so anchoring on that arbitrary point creates a dangerous distraction.

Blind spot Bias

What is it? Blind spot bias occurs when you can objectively assess others’ behavioral biases, but you cannot recognize your own.

When is it helpful? Blind spot bias helps you avoid over-analyzing your every imperfection, so you can get on with your one life to live. It helps you tell yourself, “I can do this,” even when others may have their doubts.

When is it harmful? It’s hard enough to root out all your deep-seated biases once you’re aware of them, let alone the ones you remain blind to. In “Thinking, Fast and Slow,” Nobel laureate Daniel Kahneman describes (emphasis ours): “We are often confident even when we are wrong, and an objective observer is more likely to detect our errors than we are.” (Hint: This is where second opinions from an independent advisor can come in especially handy.)

Confirmation Bias

 What is it? We humans love to be right and hate to be wrong. This manifests as confirmation bias, which tricks us into being extra sympathetic to information that supports our beliefs and especially suspicious of – or even entirely blind to – conflicting evidence.

When is it helpful? When it’s working in our favor, confirmation bias helps us build on past insights to more readily resolve new, similar challenges. Imagine if you otherwise had to approach each new piece of information with no opinion, mulling over every new idea from scratch. While you’d be a most open-minded person, you’d also be a most indecisive one.

When is it harmful? Once we believe something – such as an investment is a good/bad idea, or a market is about to tank or soar – we want to keep believing it. To remain convinced, we’ll tune out news that contradicts our beliefs and tune into that which favors them. We’ll discount facts that would change our mind, find false affirmation in random coincidences, and justify fallacies and mistaken assumptions that we would otherwise recognize as inappropriate. And we’ll do all this without even knowing it’s happening. Even stock analysts may be influenced by this bias.

Familiarity Bias

What is it? Familiarity bias is another mental shortcut we use to more quickly trust (or more slowly reject) an object that is familiar to us.

When is it helpful? Do you cheer for your home-town team? Speak more openly with friends than strangers? Favor a job applicant who (all else being equal) has been recommended by one of your best employees? Congratulations, you’re making good use of familiarity bias.

When is it harmful? Considerable evidence tells us that a broad, globally diversified approach best enables us to capture expected market returns while managing the risks involved. Yet studies like this one have shown investors often instead overweight their allocations to familiar vs. foreign investments. We instinctively assume familiar holdings are safer or better, even though, clearly, we can’t all be correct at once. We also tend to be more comfortable than we should be bulking up on company stock in our retirement plan.

Ready to learn more? Next, we’ll continue through the alphabet, introducing a few more of the most suspect financial behavioral biases.

The ABCs of Behavioral Biases Introduction

By now, you’ve probably heard the news: Your own behavioral biases are often the greatest threat to your financial well-being. As investors, we leap before we look. We stay when we should go. We cringe at the very risks that are expected to generate our greatest rewards. All the while, we rush into nearly every move, only to fret and regret them long after the deed is done.

Why Do We Have Behavioral Biases?

Most of the behavioral biases that influence your investment decisions come from myriad mental shortcuts we depend on to think more efficiently and act more effectively in our busy lives.

Usually (but not always!) these short-cuts work well for us. They can be powerful allies when we encounter physical threats that demand reflexive reaction, or even when we’re simply trying to stay afloat in the rushing roar of deliberations and decisions we face every day.

What Do They Do To Us?

As we’ll cover in this series, those same survival-driven instincts that are otherwise so helpful can turn deadly in investing. They overlap with one another, gang up on us, confuse us and contribute to multiple levels of damage done.

Friend or foe, behavioral biases are a formidable force. Even once you know they’re there, you’ll probably still experience them. It’s what your brain does with the chemically induced instincts that fire off in your head long before your higher functions kick in. They trick us into wallowing in what financial author and neurologist William J. Bernstein, MD, PhD, describes as a “Petrie dish of financially pathologic behavior,” including:

What Can We Do About Them?

In this multi-part “ABCs of Behavioral Biases,” we’ll offer an alphabetic introduction to investors’ most damaging behavioral biases, so you can more readily recognize and defend against them the next time they’re happening to you.

Here are a few additional ways you can defend against the behaviorally biased enemy within:

Anchor your investing in a solid plan – By anchoring your trading activities in a carefully constructed plan (with predetermined asset allocations that reflect your personal goals and risk tolerances), you’ll stand a much better chance of overcoming the bias-driven distractions that rock your resolve along the way.

Increase your understanding – Don’t just take our word for it. Here is an entertaining and informative library on the fascinating relationship between your mind and your money:

Don’t go it alone – Just as you can’t see your face without the benefit of a mirror, your brain has a difficult time “seeing” its own biases. Having an objective advisor well-versed in behavioral finance, dedicated to serving your highest financial interests, and unafraid to show you what you cannot see for yourself is among your strongest defenses against all of the biases we’ll present throughout the rest of this series.

As you learn and explore, we hope you’ll discover: You may be unable to prevent your behavioral biases from staging attacks on your financial resolve. But, forewarned is forearmed. You stand a much better chance of thwarting them once you know they’re there!

In our next piece, we’ll begin our A–Z introduction to many of the most common behavioral biases.

Half of a Whole: When You Lose a Spouse

PLEASE DOWNLOAD OUR DETAILED GUIDE: WEALTH MANAGEMENT FOR WIDOWS

 

Whether it’s sudden and unexpected or after an already lengthy ordeal, there’s nothing that can prepare you for losing your spouse. Grief and mourning affect each of us uniquely, but all widows and widowers share a painful dilemma: On the one hand, the world seems to demand rapid response to a barrage of critical questions – financial and otherwise. On the other hand, it’s usually a terrible time to be making big decisions, especially if they really can wait.

Here are some helpful handholds to hang onto if you have been recently widowed (or you know someone who has), plus preemptive steps to take if you’re reading this in happier times.

If you’ve just been widowed …

Don’t decide anything you don’t have to – especially about your finances.

This may seem like odd advice from a financial advisor. Our usual role is to help people make sound money decisions and get on with their lives. The thing is, when you’re experiencing grief, it’s not just an emotion. It’s a biological process affecting your ability to make rational decisions regarding your financial interests. Even small choices can feel overwhelming, let alone the big ones. That’s why our advice at this time is to put off anything that can wait.

By the way, most financial decisions are NOT as urgent as they might seem.

This brings us to our next point. Remember, service providers, friends and family (who may also be grieving) may mean well. But their sense of urgency – and your own – may be off-kilter. Basically, unless all heck is about to break loose if you fail to act, give yourself a break and assume most financial decisions can wait.

Create the space to focus on matters that actually are urgent.

Putting long-term plans on hold also helps create space to take care of the essentials, such as making funeral arrangements, managing immediate expenses, and simply taking care of yourself and your dependents. Do make sure you’ve got enough cash flow available to make daily purchases and pay your bills, so these don’t become a source of added stress. Gather imminently critical paperwork such as any pre-planned funeral arrangements, and multiple copies of the death certificate. It’s also best to ensure your and your children’s healthcare coverage remains in place. Let everything else slide for a little while, and/or …

Lean on others, even if you don’t usually.

You don’t have to go it alone. For practical and emotional support, turn to friends, family, clergy and similar relationships. For financial and legal paperwork, contact professionals such as your financial advisor, CPA and insurance agent. Focus on relationships that help relieve your burden and avoid those that burn up your limited energy. Be cautious about forming brand new relationships at this time; unfortunately, seemingly sympathetic con artists prey on those whose defenses are down.

Take some time to learn more about the types of clients we serve and our process for partnering with women in transition from the loss of a spouse.

After a little time has passed …

Assess where you’re at.

Once you feel ready to take on some of the mid- and long-range logistics, slow and steady remain the ways to go. It can be helpful and cleansing to start by gathering up your scattered resources. Wills and trusts, insurance policies, financial statements, personal identification, mortgages, retirement benefits, safety deposit box contents, business paperwork, military service records, club memberships … Whether on paper or online, take stock of what you’ve got.

Reach out.

Continue reaching out to others to address your evolving needs. Turn to your financial advisor for assistance in organizing your investment accounts, shifting ownerships as needed, closing or consolidating unnecessary ones, and sorting through your spouse’s retirement and work benefits. Contact your spouse’s employers to learn more. Work with a lawyer for settling the estate. Meet with an insurance specialist to revisit your healthcare coverage. Speak with your accountant about the necessary tax filings. Contact creditors about resolving any outstanding debts. Firm up your ongoing banking and bill-payment routines.

Shift your focus outward.

When it comes to lifetime transitions, each of us is on our own schedule. But eventually, the time will come when you’re ready to circle back to those larger decisions you put on hold. Again, don’t go it alone. Your financial advisor can help you take a fresh look at your finances – your earning, saving, investing and spending plans. You also may start to look at your larger wealth interests, such as your will, trusts, overall insurance coverage and more. Whether you determine everything is fine or adjustments are warranted, wait until you’re at a place in which you can make these sorts of decisions deliberately instead of in haste.

Pre-planning is an act of love …

If you’re reading this piece during happier times, we can’t emphasize enough how important it is to pre-plan for when one or both of you pass away. Pre-planning can simplify or even eliminate some of the most agonizing decisions surviving family members must face during one of the worst times in their lives. As such, your wills, trusts, powers of attorney, living wills (advance directives) and pre-planned funeral arrangements may be among the most loving gifts you can give one another as a couple, especially if you have dependent children. If these key estate planning materials are not yet in place, there’s no better day than today to give each other the gift

How else can we help? When you’re ready to talk, please know we will be here to listen.

Bonds—Stability and Income for Your Portfolio

Many individuals generally view bonds as conservative investments that provide steady income and a higher degree of protection of principal. When the equity markets do exceptionally well, it may be tempting to overweight your portfolio with equity investments. However, it’s important to maintain an even approach to investing during market swings and to ensure your investments are well diversified at all times. Thus, bonds may merit consideration as a component of your portfolio.

Equity vs. Fixed Income

When it comes to investing, you can be either an owner or a lender. If you own stock (or shares of a mutual fund that invests in stocks), you are a shareholder and literally own a part of a company. The company has no obligation to pay you back by redeeming your shares, and the value of your shares will rise or fall with the fluctuations of the market.

On the other hand, when you buy bonds, you are acting as a lender. That is, you are “lending” your money to an entity (e.g., a company, state, municipality, or the U.S. government) for its promise to pay, which takes the form of periodic interest and a return on your principal. The borrower does have an obligation to you (the bondholder), to repay. However, it is possible for the borrower to default on this obligation to pay interest and principal.

Bond Basics

One of the most common questions posed by potential bond investors is: “What is bond yield?” When most people mention yield, they are referring to current yield (i.e., the current annual interest income divided by the initial price paid for the investment). Perhaps a better measure for investors is yield to maturity, which provides the most complete measurement of performance, taking into account the present value of future interest payments.

There are several factors that can affect yield. However, one of the more important considerations is credit rating. Lower quality issues tend to pay higher yields to compensate for added risk. In addition, for bonds carrying similar credit ratings, it is typical that the longer the time until maturity, the higher the yield tends to be.

What About Bond Funds?

Like stocks, successfully investing in bonds requires a great deal of knowledge and experience. For this reason, bond mutual funds can be a good way to incorporate bonds into your portfolio. A bond fund is managed by financial professionals who use their knowledge and experience to purchase a variety of bonds that are consistent with the fund’s stated objectives. However, unlike individual bonds, a bond fund has no obligation to pay a stated interest rate or return your principal. As an investor, you should be aware that investment returns and principal values of bond mutual funds will fluctuate due to market conditions. Therefore, when shares are redeemed, they may be worth more or less than their original cost.

Many investors who understand bond yield may still have a difficult time accurately comparing the performance of bond funds when fund companies calculate and advertise yields in different ways. Fortunately, the Securities and Exchange Commission (SEC) has established an industry standard for computing yield in mutual fund advertisements and sales literature. The standard creates a fixed-yield quote requirement for bond mutual funds, making it easier for investors to decide which bond funds are most suitable for their individual investment portfolios. In addition, a fund’s prospectus can be consulted for a complete list and description of its holdings, as well as information on risks, fees, and expenses. Always read it carefully before investing.

Before You Decide. . .

Bonds can be a valuable addition to your portfolio because of their ability to help maintain principal and provide income. However, the percentage of your portfolio you choose to invest in bonds should be determined by your overall goals and objectives. Despite the allure of potentially higher returns from equities, bonds may still deserve some of your investment attention.

2017 2nd Quarter Update

How many new ways are there for the same old market forecasters to twist a timeless truth: None of us has any idea what the markets will do next.

Consider the following quote from a recent Wall Street Journal article entitled, “Global Stocks Post Strongest First Half in Years, Worrying Investors.”

“The question for stock investors is whether the strong first six months [of 2017] heralds a choppier second half or the start of a multiyear upswing. The data on global rallies offers a mixed record.”

Let’s translate that into plain-speak:

“We have no clue whether high-flying markets will go up or down the rest of the year. Heads or tails, we can’t call it either way.”

The article also reports: “All but four of the 30 major indexes representing the world’s biggest stock markets by value have risen this year, a first-half performance unmatched since 2009.”

What should we make of this data point? Or debates on whether U.S. equities are over-valued? Or the mixed signals on rising versus stay-put interest rates?

And by the way, why would strong returns worry investors, as the WSJ article title suggests? Shouldn’t we celebrate them?

Rather than try to answer unanswerable questions about a wonderful or worrisome future, here’s a more useful question to consider:

Does your low-cost globally diversified portfolio still reflect your goals and risk tolerances?

If the answer is yes, that’s great news. There is no sure-fire investment approach that guarantees you’ll come out ahead. As Nobel laureate Eugene Fama has observed, “The probability that you can lose money never goes away … It’s the nature of the beast.” That said, you are already doing all you can to capture expected market returns while managing the risks involved.

But what if your portfolio seems off-track from your carefully crafted plans? Perhaps your own goals have changed. Or recent market surges may have shifted your portfolio’s target allocations, so you’re now holding a little too much of a good thing. That’s nice as long as those high-flying assets continue to soar, but it can set you up for an overly hard fall when they stumble.

Because prudent portfolio management calls for maintaining your balance in good markets and bad, we focus on questions of a different sort. Questions like: How can we best employ upfront asset allocation and ongoing rebalancing to keep your portfolio on track toward your personal financial goals?

If you ask us, that’s a better question than what the rest of 2017 has in store for us as investors. For all the clever ways there are to phrase a forecast, that’s anybody’s guess.