Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Christine Benz | 07-22-2013 11:00 AM

Avoiding Today's Lurking Behavioral Land Mines

Investors' scars from the 2008 market downturn are still looming just beneath the surface, says financial planner Mark Balasa.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

A big part of a financial advisor's job is to help clients stay the course and avoid big landmines. Joining me to discuss some big landmines that lurk today is Mark Balasa from the firm Balasa Dinverno & Foltz.

Mark, thank you so much for being here.

Mark Balasa: My pleasure.

Benz: Mark, let's talk about how big a role some of these behavioral pitfalls play in terms of what you do as a financial planner. How much do you help counter clients' own worst tendencies?

Balasa: I think in many ways, it's the biggest part of our job. When I first came into this business, I thought that one of the most important things about helping a client with their portfolio was understanding a particular investment theory, asset class valuations, etc., and that's important. But what's really important is to help someone counter their own intuitions and emotions.

Think about some of the biggest investment firms in this industry, take PIMCO for example. PIMCO has an investment committee that puts together their best thoughts and their best ideas. But they have a shadow committee, that's there to provide a counter argument to what they are thinking, and this I think is a great example of even the professionals in the business putting in place mechanisms and safeguards against getting too emotional, one way or the other, and that applies to individual investors as well.

Benz: When you think about your clients and some of the things that have tripped them up over the years, can we talk about how some of these behavioral mistakes have played out in your practice? And then, I'd like to hear about how you help coach clients to counter their own instincts?

Balasa: So many times, people come to our firm with financial scars, emotional scars. Many times of course, it's on the loss side. It's either they were too concentrated, they stayed in a particular stock too long, all kinds of different stories. But what ends up happening for the individuals, and for professionals frankly, is they start to make decisions not based upon good economic sense but based upon either their view of what a stock should be worth or an anchoring, for example.

So I'll give you an example of people who come in and they say, my portfolio was at x number of dollars, and this is what I held; we're not going to sell any of these until we get back to even. So then we can make some choices, because I'm not going to recognize a loss.

So I understand the emotional pain with realizing a loss, but that doesn't make great investment sense. So, that's one example that comes to mind.

Benz: The 2008 market meltdown, really I'm sure, created a lot of scars for investors. Are you still seeing those when you talk to clients? Are people still exhibiting behavior that show that they are very much plugged into what happened to them in that very bad market environment?

Read Full Transcript

{1}
{1}
{2}
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
{1}
{5}
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article
    Username: