Investing is not just about crunching numbers and analyzing charts; it’s also about managing your mindset and emotions. Behavioral finance, a subfield of behavioral economics, highlights the significant impact of psychological factors on investment decisions. By understanding and managing these factors, investors cannot only avoid common pitfalls but also potentially improve their returns.
Understanding Behavioral Investing
Behavioral investing starts with acknowledging that investors are not always rational. Traditional financial theories assume that individuals act rationally, making decisions based on all available information to maximize utility. However, real-world behavior often deviates from this ideal. Investors are influenced by emotions and cognitive biases that can lead to suboptimal decisions.
Common Psychological Biases in Investing
There are several psychological biases that can affect your investment decisions. However, once you are aware of them and their influence on your thinking, you can learn how to overcome them. Below is a list of the critical biases to avoid:
- Overconfidence: Many investors overestimate their ability to predict market movements. This overconfidence can lead to excessive trading and risk-taking, often resulting in lower returns due to higher transaction costs and poor timing.
- Recency Bias: Investors tend to give more weight to recent events when making decisions. This bias can lead to overreacting to short-term market fluctuations and abandoning long-term strategies.
- Anchoring: Investors often fixate on specific pieces of information, such as the purchase price of a stock, and let it unduly influence their decisions. This can prevent them from making rational choices based on current market conditions.
- Confirmation Bias: People tend to seek out information that confirms their existing beliefs and ignore evidence that contradicts them. This bias can reinforce poor investment decisions and lead to missed opportunities.
- Loss Aversion: Investors feel the pain of losses more acutely than the pleasure of gains. This bias can cause them to hold onto losing investments too long, hoping to avoid the regret of realizing a loss and sell winning investments too quickly to lock in gains.
The Impact of Behavioral Biases
Behavioral biases can significantly impact your investment performance. Studies consistently show that average investors tend to underperform compared to market indices like the S&P 500. For example, research from Dalbar’s “Quantitative Analysis of Investor Behavior” found that typical equity mutual fund investors earned much less than the market average over several decades. This underperformance is mainly due to poor decision-making driven by psychological biases.
These biases cause investors to make irrational choices, such as selling stocks during market downturns out of fear or holding onto losing investments too long in hopes of a rebound. You can avoid common mistakes and improve your investment returns by recognizing and managing these biases. Understanding how these psychological factors influence your decisions is the first step toward becoming a more disciplined and successful investor.
Behavioral Finance in Action
During the 2008 financial crisis, many investors reacted emotionally to market downturns, selling their investments at the worst possible times. Those who lacked a clear investment strategy and succumbed to panic selling realized significant losses. The same can be said of the COVID-19 pandemic crash, which saw more than a full recovery in the years to follow. Investors who had pre-committed to specific financial goals and maintained a disciplined approach fared much better than those who let their emotions get the best of them.
Behavioral finance provides tools to help investors manage their emotions and make better decisions. Investors can avoid impulsive actions by understanding their investment personality, which refers to their risk tolerance, investment goals, and financial situation, and setting clear, long-term goals that align with them. Working with us can help you develop a personalized plan that matches your financial goals and psychological profile.
Strategies to Mitigate Behavioral Biases
- Acknowledge Your Biases: The first step in managing behavioral biases is awareness. Recognize that you, like all investors, are susceptible to these biases. Regularly review your past investment decisions to identify patterns and areas for improvement.
- Embrace a Long-Term Mindset: Focus on your long-term financial goals rather than short-term market fluctuations. This approach helps you stay committed to your investment strategy even during volatile periods.
- Automate Your Investments: Automating contributions and rebalancing your portfolio can help counteract emotional impulses. Automatic investing ensures that you continue to invest consistently, regardless of market conditions.
- Educate Yourself: Learn about behavioral finance and how psychological biases affect decision-making. Resources like “The Psychology of Money” by Morgan Housel and “Personal Benchmark” by Chuck Widger and Daniel Crosby can provide valuable insights.
- Regularly Review Your Plan: Collaborate with us to review and adjust your investment strategy periodically. This helps ensure that your plan remains aligned with your goals and adapts to changing market conditions.
Protect Your Returns From Yourself
By understanding and mitigating the impact of psychological biases, you can make more informed decisions and improve your investment performance. Remember, while market analysis and financial theories are important, managing your mindset and emotions is equally critical in determining your returns.
Investing is not just about selecting the right assets; it is also about maintaining discipline and staying committed to your long-term goals. Implementing a well-thought-out strategy and sticking to it can help you navigate the emotional roller coaster of investing and achieve a secure and fulfilling financial future. Remember, you can be your own worst enemy in investing, but with the right approach, you can turn behavioral management into your greatest asset.
If you have any questions, give us a call, or read Chapter 1 of “Wealth on Purpose” by Bryan Ballentine.
Sources: Located at the bottom of the article.
Golf Tip of the Week
Are Mallet Putters Better Than Blades? What Our Hot List Player Ratings Reveal
When it comes to how best to improve your game on the greens, the debate over whether the blade or the mallet is a better solution seems as dubious a pursuit as deciding whether vanilla or chocolate is a better flavor of ice cream. (Chocolate, obviously … ) The issue really isn’t whether blades provide a more natural look at address and feel at impact for better overall direction and distance control, or whether mallets provide more built-in forgiveness and alignment features to create more consistency for strokes that need help even at the highest level (see Scottie Scheffler).
No, it doesn’t matter in any practical sense whether you gravitate toward a mallet or blade. With the plethora of fitting tools and stroke analytics to help any golfer gain a clearer understanding of how one style of putter is going to work better than another, the starting point in your search for a new putter shouldn’t be about deciding once and for all that you are a blade user or a mallet fan. One shape will produce results that give you more confidence. The right tool for you should be dialed into your length and alignment requirements, with a specific focus on making sure the sole of your putter rests squarely on the ground at address. Then, it’s a matter of understanding results (distance control, consistency of center face contact, truer roll, etc.), not simply leaning on the model that you’ve holed the most putts with.
It is true that there have been some long-standing thoughts about whether a blade, generally with its hosel attached in the heel, works best with strokes that have more arc to them. Conversely, there is the long-standing saw that putters with a more face-balanced orientation will work best with strokes that are more straight back and through.
Of note: Putters with more of heel-based orientation feature what’s called toe hang, which reflects the natural tendency of the face to more easily open and close within the stroke. Toe hang is easy to see when you balance the putter on its shaft on the edge of a table with the head hanging over the edge. The greater the angle that the toe points from straight perpendicular shows how easy it is to manipulate. Meanwhile, when a putter is described as “face-balanced,” its face will point straight up to the sky when balanced on the edge of a table. It is generally more often the case that mallets are face-balanced than blades, but increasingly because of new ways of weighting mallets internally, these larger heads can feature toe hang to make them more easy to swing on an arc stroke. Here’s a deeper dive on how toe-hang and face-balanced are determined, from the club component website Hireko.
Or so has been the thinking. Chris Marchini, director of golf experience for Golf Galaxy and the chief fitter at the Hot List, doesn’t think it’s that simple anymore.
“We’re really starting to take a look at what kind of putter works with what kind of player and what kind of stroke, and right now, we’re seeing evidence that it’s not even the case most of the time that face-balanced putters work with one kind of stroke and toe-hang putters work with a different kind of stroke,” he said. “I’ve seen plenty of times where you think a player that pulls putts will still pull putts with a face-balanced putter, and a player that pushes putts will still push them with a toe-hang putter.”
Hot List 2024: Best Mallet Putters
There are, he said, a lot of variables in play, including perhaps how far back the center of gravity might be on one putter vs. another, and whether that internal weighting better aligns itself with a particular stroke. Nick Sherburne, founder at Club Champion where he wrote the training manual for the fitters at the company’s 135 facilities, has seen the shift toward mallets, as well. “Teachers and teaching aids have pushed folks away from an arcing stroke to more of a straight-back, straight-through motion, which lends itself better to a mallet,” he said.
Of course, mallets have more options to go along with better forgiveness and alignment features today than blades can match. Indeed, mallets can have more of the feel in your stroke you’ve previously only had in blades while building in more features to dial in aim and consistency. That’s exactly what we’ve seen with Scheffler’s switch from a blade to a mallet that helped key his run to a dominant position as world No. 1. Scheffler’s TaylorMade Spider Tour X L-neck helped give him a similar control that he previously had in a blade with more forgiveness. The result is a 71-spot jump in his rank in strokes gained putting, moving from a negative number to a positive one.
Of the top 30 players in the world right now, 21 use mallet putters, including seven of the top 10 and four of the top 5, a fundamental shift from 20 years ago when 17 of the top 20 players in the world preferred blades.
Hot List 2024: Best Blade putters
Is there something that has made mallets a more natural go-to, or even something less direct that makes players of any kind prefer mallets over blades? A look at our Hot List scoring shows a slight preference overall for mallets over blades. Specifically, when our players provide scores for putter ratings, they give us a 1-5 preference for Look, Sound/Feel and Performance, where “1” is quite terrible and “5” is quite excellent. If you look at the average Performance scores for all players for all mallets that made the list, that score is slightly higher than a similar average score for Performance for the blade putters that made the Hot List. The median Performance score for any mallet from our players’ ratiings was 4.02, while the median for all blades was 3.96.
Admittedly, it’s not a huge advantage, but what makes that advantage more telling is that our players were giving a much higher Look score to blades than they were mallets (3.88 to 3.76). In other words, mallets were working better than the initial impression at address might have led our players to believe. Or more precisely, our players might not have been in love with the looks of a mallet but they were very much smitten by the results.
The mallet may not have the jewelry-like sex appeal of a blade, but its versatility is an overwhelming benefit. If you decide to branch out from a lifelong affinity for the classic blade, be clear that it matches up with the right length and weight (both overall head weight and internal weighting) for your stroke. We can’t promise Scheffler-like results, but we don’t really see how you’d be giving up anything, either.
Tip adapted from golfdigest.comi
Recipe of the Week
Watermelon Lemonade Slushie
4 Servings
Ingredients
- 2 pounds cubed watermelon (about 4 cups)
- 1/2 cup sugar
- 1 large bunch basil, stems and leaves roughly chopped (about 2 cups), plus 4 whole leaves for garnish
- Juice of 3 lemons (about 1/2 cup)
Instructions
- Place the watermelon in a single layer on a rimmed baking sheet, and freeze until completely frozen, like ice cubes, about 2 hours.
- Meanwhile, cook the sugar and 1/2 cup water in a small saucepan over medium heat, stirring occasionally, until the sugar is completely melted, about 5 minutes. Turn off the heat, add the chopped basil and stir until completely wilted. Cool completely at room temperature, at least 1 hour.
- When the watermelon is completely frozen, put half in a blender. Strain the basil syrup into the blender, use the back of a wooden spoon or spatula to press down on the basil to extract as much flavor as possible, and discard the basil. Add the lemon juice, and blend until the mixture is mostly smooth, pushing it down with a wooden spoon or spatula if needed. Add the remaining watermelon, and continue to blend until the mixture is completely smooth.
- Spoon the mixture into 4 short glasses (or wineglasses, if you want to be fancy), and garnish each with a basil leaf.
Recipe adapted from foodnetwork.comii
Travel Tip of the Week
5 Beach Vacations You Can Take for Less Than $100 a Day
When you’re overworked and overstimulated, not much else beats sitting on a beach and watching the waves roll in. In fact, according to Vacasa’s 2024 Summer Travel Trends report, 63 percent of travelers are planning on spending their summer vacation next to a body of water.
It’s a reset everyone deserves, but not everyone can afford — especially when you start looking at the lineup of the best beach resorts in the U.S. But getting that dose of sun, sand, and surf doesn’t have to include Michelin-starred dining or a stay in a five-star hotel. In fact, there are several beach vacations that can be booked for less than $100 a day.
We did the legwork to come up with a list of beach vacations that are affordable and awesome. While we’ve excluded the cost of getting there, these trips take into account lodging, activities, and food. Note: This list is for those traveling with a friend or partner so you can share lodging costs and eat in as much as possible.
Panama City Beach, Florida
If you’re heading to Panama City, make sure to visit St. Andrews State Park, which runs along the water and offers that Florida beach vibe with white sand and lots of opportunities for swimming, surfing, and snorkeling. We recommend booking one of the park’s new glamping tents, complete with a queen-size bed and air conditioning. As an added bonus, your nightly rate includes the park entry free and a ferry ride to Shell Island, known for its pristine beaches and water.
Lodging: $80 a night when splitting the cost with someone (a $7 per night fee for electric is not included in the rate)
Activities: $0 (the ferry to Shell Island is included in your lodging rate)
Food: $12 for a shared pizza at Shore Shack Pizza
Related: I’ve Lived in Florida for 27 Years — and These Are the Best Affordable Beach Vacations in the State
Atlantic Beach, North Carolina
Atlantic Beach is set along North Carolina’s “Crystal Coast,” an 85-mile stretch that has 56 miles of protected beach. There aren’t many budget options, but the Windjammer Inn is a hidden gem. Although the rooms are simple, everyone gets an oceanfront view and pool access, plus the ocean is just out front. When you’re ready to go beyond the beach, rent a bike and make your way to Fort Macon State Park.
Lodging: $70 a night at the Windjammer Inn when splitting the cost with someone
Activities: $25 for an all-day bike rental from AB Bike & Beach Rentals
Food: $3.50; grab a lunchtime slice at Roma Pizza & Subs
Related: 10 Best Beach Towns in North Carolina, According to Locals
Waldport, Oregon
The wild Oregon coast is the perfect place to be during the height of summer. Because of the Alsea River, there’s water all around, and to the south you’ll find Governor Patterson Memorial State Recreation Site, which has miles of flat, sandy beach.
Just south of the park lies a tiny home community with small, affordable lodging. In addition to a private kitchen, you’ll have access to a greenhouse and common hangout areas. The beach is a five-minute walk away.
Lodging: $47 a night for a tiny home when splitting the cost with someone
Activities: $0; when you’re tired of the beach, hike along the Oregon Coast Trail
Food: $17 for fish and chips from the Oregon Fishmongers food truck
Oceanside, California
Instead of visiting pricey Laguna Beach, head south to the city of Oceanside, which sits right on the water and is a surfer favorite. The biggest perk of this beach vacation is the fact that this Airbnb is close to both Oceanside and Carlsbad, so you have more beaches options. Plus, the Airbnb has off-road parking along with loaner bikes, beach chairs and umbrellas, and surfboards and bodyboards.
Lodging: $55 a night for the Airbnb when splitting the cost with someone
Activities: $0; bike to Mission San Luis Rey or take the boards and beach chairs to the ocean
Food: $18 for a happy hour burger and fries at The Switchboard
Related: 21 Best Beaches in California
South Padre Island, Texas
There are 25 beach access points off the boulevard that runs along South Padre Island, making it easy for everyone to walk to the beach, regardless of where they’re staying. The island also has plenty of beach- and ocean-related activities, including a walking trail that leads to 13 hand-painted, five-foot sea turtles as well as a sandcastle trail that showcases castles sculpted by professional sandcastle artists.
Lodging: $70 a night for two for this family-friendly Airbnb, but the place sleeps eight (and has a private pool)
Activities: $10; drop by the South Padre Island Birding, Nature Center, and Alligator Sanctuary to walk the boardwalks, visit the butterfly garden, and check out the gators
Food: $19 for the fried flounder (comes with fries, slaw, and hushpuppies) at Doc’s overlooking the water
Tip adapted from travelandleisure.comiii
Copyright (C) 2021. Ballentine Capital Advisors. All rights reserved.
Our mailing address is:
Ballentine Capital Advisors
15 Halton Green Way
Greenville, SC 29607
Sources:
Behavioral Finance: Biases, Emotions and Financial Behavior
Understanding Investor Behavior
Mind Over Money: How Behavioral Finance Shapes Investment Decisions
Disclosure:
Ballentine Capital Advisors is a registered investment adviser. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.
Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.
This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.
No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.
Advisory services through Ballentine Capital Advisors, Inc.
i https://www.golfdigest.com/story/are-mallet-putters-better-than-blades–what-our-hot-list-player-
ii https://www.foodnetwork.com/recipes/food-network-kitchen/watermelon-lemonade-slushie-3363207
iii https://www.travelandleisure.com/beach-vacations-less-than-100-a-day-8669890
