Quarterly Thoughts – Q4 2011

Instincts are sometimes critical for survival. If you experience fear of physical danger, your instinct may be what saves your life or the life of others. Before you’ve had time to think, fear triggers an automatic response that may cause you to run, duck, jump or fight. Unfortunately, an increasing number of behavioral finance studies show that instinct and investing often mix poorly. The human brain often responds to concern about difficult markets as if they posed a physical danger.

A 2011 study by Financial Engines and AON Hewitt indicates that the combination of instinct and poor planning can be costly. Investors on their own had returns that were 2.9% lower per year on average compared with those who had professional help, primarily due to inappropriate risk levels and inefficient portfolios. Fear [read: instinct] and the related inertia often lead unguided investors to be too conservative early in their careers, followed by anxiety [read: instinct] about catching up, which often leads people to take far too much risk near retirement. Then, when risk happens, panic ensues, and the cycle continues.

WealthStep’s longstanding focus on behavior finance helps clients combat this phenomenon, through a disciplined and proven approach, and on-going investor sophistication education opportunities for clients through articles, webinars and videos.