Unlocking the power of trusted advice in today’s financial landscape

From 1991 to 2021, the S&P 500® achieved an impressive average return of 10.65% annually. Over the exact same period, however, the average equity investor realized an average annual return of just 7.13%.¹

It may not seem like a substantial difference at first glance, but that 3% translates to over a $1.2 million difference where the average investor has $800,000 and the S&P 500 would return over $2 million in the same period.

Too often, emotions cloud our judgment, causing us to buy stocks when they’re overpriced, sell stocks after their value falls, or hold on to underperforming stocks. Avoiding these common pitfalls requires diligent effort, which starts with identifying and acknowledging our “less than optimal” actions.

The importance of trusted advice

The intrinsic value of expert advice resonates with all of us, whether it’s regarding our health, taxes, legal documents, or wealth management. Yet, the greatest value of trusted advice lies in its ability to prevent decisions driven by emotions rather than evidence. Cognitive biases affect us all—they’re universal.

When you work with a financial professional to create a comprehensive financial strategy that addresses both your short- and long-term goals, the strategy functions much like the guardrails on a highway—keeping you moving in the right direction and preventing your emotions and biases from leading you astray.

It’s the people who go against the grain who often come out on top. To have the confidence to do so, however, requires considerable patience and a thoughtful plan. And sticking to a plan can be especially challenging during times of extreme market turbulence when the smartest long-term investment decisions may not lead to the best short-term results. Thoughtful, strategic financial planning is a marathon, not a sprint.

Understanding your biases

The field of behavioral finance, established in the 1980s by the psychologist, economist, and Nobel laureate Daniel Kahneman, has evolved greatly over the years. Thanks to the work of visionaries like Kahneman and Richard Thaler, as well as to a new generation of behavioral economists that includes Shlomo Benartzi, we have a much better understanding of dozens of biases that frequently short-circuit our financial decision-making when there is volatility in the markets. Here are a few of the most common biases:

Herding bias:

From prehistoric times, when straying from the pack and exploring the unknown could be lethal, the tendency to follow the crowd financially (even when it may not be in our own best interest) seems to be hardwired into our human DNA. From the Dutch “tulip mania” of the 1600s to the dot-com bubble of the late 1990s to the recent the astronomical rise and equally rapid descent of cryptocurrencies, history is littered with examples of our eagerness to jump on the latest trend to appease our innate FOMO (fear of missing out).

Overconfidence bias:

We tend to overestimate both what we are capable of and how much we know. Look no further than an oft-cited 1980s psychological study finding that more than nine in ten Americans considered themselves to be above-average drivers. We reinforce this behavior as a society by valuing certainty over uncertainty. Nobody wants to hear “I’m not sure” from their physician. Overconfidence explains why we typically expect good things rather than bad things to happen to us, and it is the main reason (along with loss aversion) that we tend to sell our successful investments too early and hold on to our bad investments too long.

Status quo bias:

We are creatures of habit who generally prefer the comfort of the familiar. Change can be intimidating, so rather than face the unknown, we tend to put off important decisions. It’s one of the primary reasons why it can be difficult to persuade an investor to build up an emergency fund or to create a plan to cover potential long-term care costs. In tandem with our “loss aversion bias,” it also explains why so many 401(k) savers maintain the same salary deferral percentage and default allocation, even when their income is steadily rising.

Recency or availability bias:

We are inclined to place far greater importance on recent news and events than we place on long-term trends. Fueled by the almost constant 24/7 onslaught of financial news (both online and through media outlets), recency bias leads investors to flee the market after a precipitous correction and miss out on the ensuing recovery.

Through the simple act of recognizing and understanding these biases, you can make tremendous strides toward overcoming them. Awareness alone, however, won’t eliminate them. Constant vigilance and expert guidance will be needed.

Eagle Strategies LLC (Eagle) is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Eagle investment adviser representatives (IARs) act solely in their capacity as insurance agents of New York Life, its affiliates, or other unaffiliated insurance carriers when recommending insurance products and as registered representatives when recommending securities through NYLIFE Securities LLC (member FINRA/SIPC), an affiliated registered broker-dealer and licensed insurance agency. Eagle Strategies LLC and NYLIFE Securities LLC are New York Life Companies. Investment products are not guaranteed and may lose value. No tax or legal advice is provided by Eagle, its IARs, or its affiliates.

¹ Murray Coleman, “Dalbar QAIB 2023: Investors Are Still Their Own Worst Enemies,” IFA.com, April 3, 2023.