One of the most important things we do for our clients:

I am often asked how we add value to our clients when it comes to their investments.  I say the most important job I have is to stop a clients’ behavioral bias from getting the best of them. 

Recency Bias convinces us that whatever the market has been doing of late will continue.  This is one of the reasons that many investors continue to buy high and sell low when they should be doing the opposite!

As you can see from the Chart above even after the equity markets rose dramatically in 2009 and 2010 most investors could not get over the fear they experienced from the financial crisis and continued to put money into bond funds and take money out of equity funds. 

That trend finally reversed with the dramatic rise in the markets in 2013.  Recency bias kicked in and money is following the high equity returns.

Protecting our clients from these biases is one of the most important things we can do.

Do We Ever Learn our Lesson?

Earlier this week, MSN Money had an article on their website titled “ 3 Reasons to Tap into Home Equity to Buy Stocks.”  The article has subsequently been taken down.  

The article highlighted using the equity in your home as leverage to buy dividend-paying stocks.  The article did not include the fact that dividend-paying stocks can lose considerable value…to the tune of 64% during the financial crisis.

Articles like this were everywhere during the housing bubble and for the people who acted on this advice it led to devastating consequences.

I hope that we have learned our lesson and would choose to ignore these articles and ones similar.  However, as the market continues its gains be prepared for more of these to come.  The more distance between the present and the financial crisis, (5 years and counting since the 09 bottom) the higher the tendency to forget the lessons we learned in the past.

Fresh Breakouts??

I look at both fundamental and technical information when it comes to the market.  Even though you can make the argument lately that the fundamentals are still sluggish, the markets continue in their uptrend.

In fact, from a technical perspective, the markets are bumping up against and in the case of the Russell 2000, breaking through or above, long term trend lines.  If the other indices (shown below) break out as well, it would be a very positive sign for the long term trend of the markets.