Even when markets are good, emotions can overtake the best-laid investment plans, says Franklin Templeton.
In a new report, called Time to Take Stock, the company examines the human behaviors that impact investment decisions. They also highlight recent positive market developments around the world, and some strategies that’ll help investors reposition their portfolios and get comfortable with the markets.
“The pullback of the stock market in 2008 left a lingering impression on investors, so while the S&P 500 Index posted positive returns for each of the last three calendar years, many U.S. investors still worry about investing in stocks,” says Franklin Templeton.
Many investors are still looking at equities through bear market glasses,” adds David McSpadden, senior vice president of Global Advisory Services. “Everyone remembers the dramatic drop. But investors have paid less attention to the steady climb back up.”
He says while they’ve have sought traditionally safe investments [like gold], they’re only getting marginal or negative real returns due to low interest rates. As a result, your clients are likely falling short of their long-term goals.
Franklin Templeton offers this list of common behavioural ticks:
- Availability Bias: Decision-making is greatly influenced by what is personally most relevant, recent or dramatic. For investors, this can mean the unprecedented events of the 2008 financial crisis have left a stronger impression than the positive market returns in 2009, 2010 and 2011.
- Loss Aversion: The pain of loss is generally much stronger than the reward felt from a gain. The desire to avoid market losses has driven many investors to move their money out of stocks into low-yielding cash equivalents, such as U.S. money market instruments and Certificates of Deposit.
- Herding: An innate tendency to follow the crowd makes it easy for investors to get caught up in current trends. This can cause investors to lose sight of their long-term goals and pull their money out of equities at the wrong time, or sit on the sidelines while the market rises.