DJ Tierney: We enter the fourth quarter with the Federal Reserve in action, easing rates to address a weakening labor market. This is offset by robust equity market returns, both in US and international markets, driven by better-than-expected earnings. Indeed, the US economy in aggregate has exceeded the expectations of a deceleration thus far. With the robust double-digit returns we've seen from US broad stock market indices through mid-October come a plethora of investor concerns: fears that we might be in an AI bubble, the extended government shutdown, the federal deficit in debt, tariff and trade war uncertainty, the immigration enforcement policies, and political division, just to name a few.
Given this backdrop, let's consider two common investor biases we see advisors facing now: loss aversion and the gambler's fallacy. The rapid growth of AI investment has boosted stock valuations and resulted in concerns about concentration risks in an AI bubble. This could lead investors to sell US equities based on fears of an impending market crash. This is an example of both loss aversion and the gambler's fallacy.
A moment on the latter. This is when we see people believe the market will behave similar to how it's performed in the past. In this case, they presume the AI capital cycle will lead to a similar market outcome as the internet or dotcom era that ended with pronounced market downturn. The earnings and makeup of today's technology sector is indeed different than the internet boom we saw, where a broad number of startups had no earnings. The reality is, nobody knows how long this market cycle will run and which companies will achieve lasting success.
Attempts to time markets runs counter to strategic long-term asset allocation strategies. For advisors dealing with these types of client concerns, we suggest the following. First, take time to acknowledge that client concerns are justified. Second, point out that a globally diversified asset allocation plan built around an investor's wealth level and time horizon with systematic rebalancing will allow them to participate in long-term market returns. These actions can help soothe client concerns around concentration risks and should help prevent large emotionally-driven portfolio moves.
If you're looking for tools and insights to help coach clients, please check out our Advisor Playbook. It has suggestions on anticipating and managing investor biases through economic cycles and market volatility. Additionally, if you've got questions about your client portfolio allocations, we can provide a portfolio consultation where we benchmark your portfolio versus our model portfolios for comparative analytics. We are here to support you.
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