At times like this, investors should be reminded of behavioral tendencies which lead to knee jerk reactions and mistakes.

1. Overreaction/availability bias. In financial terms, overreaction is the tendency to react in the right direction—but excessively so. Example: An investor who pulls all of their money out of the stock market at the first sign of bad news. “It’s like the investing equivalent of a person who gets upset by a small thing and loses their temper completely,” said Hersh Shefrin, a professor of finance at Santa Clara University’s Leavey School of Business and author of Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing. Overreaction is often related to availability bias, which is the habit of overweighting easily available information. It can be something as small as a client seeing a dip in the account balance on their monthly statement. “If the client is prone to overreaction, something small like that can cause them to question their entire investment strategy,” he said. Availability bias makes the situation worse, since the client will likely put too much weight on information that’s new or easily available, rather than taking a step back and looking at the bigger picture. “Both of these biases tend to lead to mispricing in the market,” Shefrin pointed out. “People assume that stocks that have done really well will continue to do so for a long time, and vice versa.”
2. Focusing on short-term performance. Human beings tend to overweight the importance of whatever’s going on right now. Simply put, we’re wired to be short-term thinkers, and overcoming that tendency is a difficult—but not impossible—task. Investors may feel the pain of a loss in the moment more acutely than they’ll appreciate a gain over time. That’s not surprising, as Shefrin said, “When you lose, it hurts today.” Of course, common sense reminds us financial markets tend to reward patience. But it can be hard for investors to truly believe in a reward that’s years in the future. This behavioral bias is compounded by the fact our media consumption now means we’re bombarded with messages about short-term developments in the financial markets. News spreads through the Internet so quickly, it feels like things can turn on a dime.
3. Following the herd. Warren Buffet made his billions by blazing his own trail. And while most investors would like to follow the same path as the Oracle of Omaha, the truth is the average investor is more likely to simply follow other investors. Herd behavior can lead to all sorts of unfortunate consequences, most disastrously when an investor buys when the market is high and then sells in a panic when things start to go the other direction.
4. Confirmation bias. When you have a strongly held belief, it’s easy to see validation everywhere. This habit of noticing information that affirms your beliefs and opinions while also ignoring or denying contradictory information is known as confirmation bias. It’s powerful in part because it’s reassuring: “Once you’re comfortable with an idea, you feel better when you hear information that tells you you’re right,” Shefrin explained. While confirmation bias plays a role in everything from politics to medical diagnosis, it can be especially damaging when it comes to making financial decisions. That’s because people in the grips of confirmation bias truly believe that they’re making an informed decision—and they don’t realize the information they’re basing their choices on has been skewed by their own preconceptions.

Helping clients prepare for their financial future goes beyond getting to know them and understanding their goals. Plenty of work goes on behind the scenes. Our staff regularly attends continuing education and training. Most recently, training included raising awareness of vulnerabilities in sharing personal information. This IS something we can share – ways to limit your exposure:

1. Identifying numbers – avoid taking the bait over the internet or telephone when asked to provide identifying numbers such as driver’s license, Social Security, passport, etc.
2. Password and signatures – do not send documents containing your signature or passwords over unsecured email or other personal information that will help a scammer recreate your identity.
3. Addresses – our addresses are so readily identifiable today and if matched to personal information announcements such as vacations or events, we have opened ourselves to unwelcome visitors. Avoid announcing your schedule.
4. Current, previous or alternate names – again, readily identifiable information that a scammer may use to their advantage in becoming familiar with your past to provide security answers, such as maiden names.
5. Employment details – descriptions of your new job or promotions may target you for manipulation by those posing as vendors or co-workers to take advantage of your access to sensitive information. Don’t expose yourself before you even get started.
6. Demographics – a web search lets just about anyone know where you live but why advertise it? Social websites where you show your age, gender and lifestyle could invite others wanting to be part of it, including those with nefarious intentions.
7. History – similar to maiden names used in security questions, information about your hometown, old schools, addresses, hometown, employment can all be pieced together to create a fairly complete picture for impersonating you or compromising your security.
8. Appearance – back to social media and exposing your lifestyle. Those pictures of yourself can be snipped and used to create a fake profile. Further, they may expose others in the photos including family and friends. Think twice about being included in others’ photos that might get posted and announce your whereabouts or reflect your lifestyle. Tell your children as well.

Use common sense in sharing personal information virtually. Scammers are counting on innocent people not imagining the extremes to which they will go in taking advantage of identity vulnerabilities. Valley National Financial Advisors take securing your personal information seriously. We need your help in protecting it as well. With everyone doing their part, we hope to limit exposure to any compromise.

THINGS ARE BETTER THAN THE NEWS MEDIA WOULD HAVE YOU BELIEVE. Modern media is overwhelming pessimistic. They focus on sensationalism, scandal, gossip and tragedy. Modern news and media outlets “preferentially feed us negative stories because that is what our minds pay attention to.” Apparently there is a good reason for this; our senses bring in far more data than we can possibly process, and, because survival is the most important driving factor in our evolution, this data is fed first through an ancient sliver in the temporal lobe called the amygdala. The amygdala is our early-warning detector, sorting through data to see what might harm us. It is therefore entirely explicable that we preferentially look at negative news, and almost as obvious that profit-driven media outlets would capitalize on this instinct.

How and why the world is going to become a better place? Highly respected forward thinkers have studied trends and see a bright future particularly due to exponential technological growth. These trends show how life expectancy, global connectivity, access to resources and general quality of life are all on an upwards curve.

HAVE A HAPPY, HEALTHY & PROSPEROUS NEW YEAR!