Moving Past the Noise of Wall Street
The past few days in the market have been a test of emotions. Short-term drops can lead to a problem often experienced by investors; recency bias. Recency is described as the bias of overweighting recent events and ignoring the long-term evidence. This bias leads investors to sell when the market drops and buying after periods of strong performance. Separating your emotions from investing is a difficult thing for many investors to do. Reacting to current market events, like today, lead to poor investment decisions at the worst time.
If you spend enough time watching CNN or ready daily posts at the various financial outlets you begin to detect that the stories each day start to contradict each other. You may also notice that moves in the market do not always coincide with the news. The reality is that it's virtually impossible to predict on a regular basis what is actually going to happen in the market over the short-term. This daily market commentary can stir investors' anxiety or tempt you to chase the latest investment fad. It's time like these that one should consider the source and maintain a long-term perspective. The bottom line, stick to your personalized investment policy statement.
Many advisors and individuals are lured into the noise generated by Wall Street buying and selling out of the market, picking stocks, and/or using actively managed funds that have been rated with certain star ratings by a services such as Morningstar, Inc.. These ratings are derived based on past performance. Despite warnings mandated by the SEC stating that past performance is not a guarantee to future results, and statistics that show 4-5 star funds as a whole actually underperform lower rated funds, investors still pile money into these "5-star" funds as seen by the large inflows from investors. To make matter worse, many of these funds are actively managed mutual funds with relatively high costs. Research also shows that these funds as a whole underperform their relative benchmarks. Further, over a 15 year period ending December 31, 2014, out of 2,711 U.S equity funds only 42% survived and only 19% outperformed their benchmark.
At Siena, we focus on the things we can control in the markets by utilizing a long term investing approach with lost cost passively institutional funds based on a Investment Policy Statement designed for each client. Each IPS is carefully designed based on each clients' need, ability and willingness to take risk. We cut the conflicts of interest that come from actively managed funds with front-end or deferred loads, and cut the internal expense of these funds down as much as possible via our access to institutional wholesale funds.
Focus On What You Can Control