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Market Turmoil Gives Edge To Behavioural Finance Ideas

Tom Burroughes

11 March 2021

Months of market gyrations, for example the case of the US computer entertainment retailer , said. (Her remit includes the British Isles and Asia.)

“This is a generation of people who want to do things very quickly. Millennials are now moving into the investment space and we are going to see this more and more.” While the GameStop story plays to a “little guy vs Wall Street” narrative, that story might not last very long, she continued. 

This news service asked Carrier if background macroeconomic conditions – such as a decade-long bull market from 2009, and central bank quantitative easing – had created a false sense of security among investors, encouraging the notion that markets are a one-way bet. She agreed: “People have become confident that the market can only go one way.”

Give advisors the tools
Toews argues that too few US advisors grasp behavioural finance insights and apply them to managing client portfolios.  

“We were seeing advisors were not doing much to alter investors’ behaviour,” he said. 

Toews Asset Management has developed a communications approach for advisors to help clients understand what might appear to be counter-intuitive solutions, he continued. 

“We think traditional ideas of building portfolios are not attuned to this understanding of investors’ behaviour. A lot of work industry has recency bias,” he said. 

“Recency bias” is a term describing the cognitive bias that favours recent events over historic ones. Investors can be led into a false sense that what happened in the past few years will hold sway in the future.

He described how to visualise markets, often using examples such as the impact of the Great Depression, to help clients imagine the future of their investments.

Toews said that clients and advisors need to address goals such as avoiding big losses, achieving above-inflation growth, and maintaining gains. “That is different from maximising gains for a given level of risk,” he said, referring to the standard approach that a lot of advisors take.

A great deal of conventional approaches (a certain chunk in equities, and the rest in bonds) assume that markets are broadly efficient. But markets can misprice risk/earnings and reach a level that is extreme. 

Toews was asked if central bank quantitative easing had led investors into irrational confidence in continued stock market gains. Toews accepted that this process has contributed to people not learning more from what has happened with markets in the past.

“We now have tippy-top valuations and more people want to get into the market,” he added.