Lessons in behavioral finance: Loss aversion bias
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Hi. I’m Omar Aguilar, CEO of Schwab Asset Management.
I recognize that we’re witnessing global events of historical proportions and that there are many reasons to be worried. Among other things, record prices of commodities. Inflation fears that we have not seen in this country for over 40 years. The beginning of interest rate increases by the Federal Reserve and other central banks around the world. And, of course, the unprecedented and unfortunate Russian invasion of Ukraine.
So if you or your clients are feeling anxious, nervous, and unsettled, you’re not alone. Markets have experienced a significant increase in market volatility over the course of the last several weeks.
So we’re here to help. With behavioral finance concepts, we hope to provide you some guidance on how to navigate through these turbulent markets.
During high levels of uncertainty, the most typical emotional bias that is present in most investors is called loss aversion. This bias has a tendency for investors to try to sell securities during high levels of volatility or during downturns as a way to prevent further losses.
There are investors that also will try to stay out of the market or to try to find the bottom of the market as a way to get back into their investments, even if these actions tend to be against their long-term investment objectives.
So what do you do about it? Stay calm, stay disciplined, and stay invested.
Stay calm. Encourage your clients to reduce exposure to those triggers of the loss aversion bias. Try to reduce exposure to media that focuses in short-term shocks and not on long-term trends.
Stay disciplined. Try to find this as an opportunity to evaluate your risk profile, try to look for tax-efficient techniques and vehicles that allows to rebalance your portfolio in a cost-efficient manner.
Stay invested. This is the most important decision during turbulent times. It has been proven that over the long run, staying invested is much better than trying to time the market.
We also have resources for you. At Schwab Asset Management, we have created a program called Biagnostics that will help you and your clients identify your behavioral biases and find a way to mitigate the effect of those in your investments.
For more, visit us at schwabassetmanagement.com/Biagnostics.
Thanks for listening.
In this brief video, Omar Aguilar, Chief Executive Officer and Chief Investment Officer of Schwab Asset Management, explains investor biases and suggested remedies that may help ease clients’ investing behaviors.
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