New resolution: Avoid the decisions that are killing your portfolio

Here's why one behavioral finance expert says all of those market prognosticators are wrong

Dec 31, 2013 @ 12:01 am

By Dr. Daniel Crosby

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Well, it's that time again. It is time for every market prognosticator within arm's reach of a Bloomberg terminal to tell us what to expect of the market in the year to come.

What is most amazing to me at this point is that anyone is still listening to the tripe produced by this perennial rite of passage. More amazing still is that financial experts, otherwise intelligent people, continue to make bold claims in the face of a growing body of evidence that says that it's nearly impossible to do.

Philip E. Tetlock, professor of psychology at the University of Pennsylvania, wrote an excellent book on the difficulties inherent in political prognostication that have sound application to the world of finance. Mr. Tetlock found that expert judgment was typically outperformed by simple statistical algorithms and that "dart-throwing monkeys” could do better than many experts.

What's more, it has also been found that those who “call” a large, once-in-a-lifetime event are typically worse at predicting subsequent events. Consider the perma-bear who fancies himself a watchman on the tower, forever griping about the woeful state of the economy. Well, in 2008, he got lucky and the world took notice, elevating him to rock star status and looking to him for future predictions. Such one trick ponies are not true experts or gifted seers of market events. They are simply people with an extremist narrative that happens to coincide with actual events every generation or so. This is the part where I remind you that even a stopped clock is right twice a day and that a certain octopus showed some promise at picking World Cup winners for a time.

But who am I to descontruct this time-honored tradition? Instead of beating them I've decided to join them and create my own list of forecasts for the year to follow. In 2014, I predict that …

• Some political hiccup will send the market into a panic, only to have it return to normal days later.

• People will continue to think that they should go it alone. After all, they are better investors than the rest of us.

• An IPO company will emerge that is going to revolutionize everything but hasn't figured out how to monetize it yet.

• Greed will continue to entice some poor investors to make bad decisions with products that seem too good to be true.

• Investors will fail to save adequately and continue to sacrifice tomorrow for today.

• The 24/7 financial media will care more about creating a frenzy of clicks, views and likes than serving the best interests of the American investing public.

• Emotion will trump logic as investors trade momentary comfort for long-term security.

• People will measure their performance relative to a market index and not what is required to meet their personal financial goals.

• Investors will trade 4% or more in returns on bad behavior in a misguided effort to achieve 2% or less “alpha.”

While the specific movements of the market may be hard to forecast, the behavior of market participants is infinitely more predictable. The new year may not be the one in which your portfolio doubles on a strong bull market, but it can be the one in which you avoid the myopic decisions that are the true cancer of most portfolios.

Dr. Daniel Crosby is a behavioral finance expert who works with organizations to develop products and messaging to maximize positive investment outcomes. Among his current collaborations is "Personal Benchmark", a system of embedded behavioral finance delivered by Brinker Capital.

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