Featured entries from our Journal

Details Are Part of Our Difference

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

David Booth on How to Choose an Advisor

The One Minute Audio Clip You Need to Hear

Category: Education

Avoid Financial Framing: Shed Your Behavioral Blinders

In the horse-and-buggy days, it was common to put blinders on your trusty steeds. It helped them narrow their frame of reference to the job at hand … or at hoof.

Even today, blinders remain a great strategy for those Budweiser Clydesdales. But for us humans, a similar behavioral bias known as narrow framing is more likely to knock us off-course than keep us sensibly invested.

What am I talking about? UCLA’s behavioral economist Shlomo Benartzi recently published an insightful Wall Street Journal piece on the subject. In it, he describes narrow framing as “a tendency to see investments without considering the context of the overall portfolio.”

Benartzi explains:

“The first [narrow framing] mistake involves people taking too little risk, which often leads to lower investment returns. When we engage in narrow framing, we tend to focus on short-term losses. … The second mistake involves people taking on too much risk without realizing it. When we don’t think about our entire portfolio, it’s easy to overlook the fact that many of our different investments might fall or fail for similar reasons.”

In other words, overly narrow framing can result in ignoring instead of accurately assessing your own and the market’s landscape of inherent risks and potential rewards. You end up investing like a horse with blinders on – but nobody is steering the cart.

Fortunately, Benartzi offers a few practical solutions, which just happen to coincide with our way of doing business here at Hill Investment Group.

“Rely on information that reflects the biggest possible picture,” he advises, but “remember not to look at it too often.” Sounds a lot like our motto: Take the Long View®, don’t you think? Helping families view their big picture is core to our approach.

Benartzi also notes that today’s aggregation software – like our recently released HIG’s Client Portal – makes it easier than ever to see the grand scheme of things at a glance.

If you’ve never had the chance to catch the Budweiser Clydesdales in action, I recommend it highly. (No, a Super Bowl commercial doesn’t count.) But when it comes to your investments, let your advisor and today’s technological tools help you eliminate your narrow-framing blinders. Being blinded will only lead you astray.

Not Everything New Is News

There’s never a lack of news in the financial press:  new studies, new reporting, new crises, new opportunities … it never ends.

Some of it is worth heeding; most of it is just noise. One of our roles at Hill Investment Group is to help you find the hidden gems in all that “new news.” Here are two worthy reminders that trying to pick individual stocks or forecast the market’s many moods remains as ill-advised as ever.

On the Dangers of Stock-Picking …

In his recently published piece, “Hot Stocks Can Make You Rich. But They Probably Won’t,” Jeff Sommer of The New York Times reflects on how investors may be tempted to chase surging stocks in hot markets. “But,” he cautions (emphasis ours), “before you jump headlong into stock picking, you may want to consider the odds … [O]ver the long run, while the total stock market has prospered, most individual stocks have not.”

This may seem counterintuitive, but for supporting evidence, Sommer cites a new study by Hendrik Bessembinder of Arizona State University’s business school (my own alma mater). Sommer points out two remarkable findings from the study, often overlooked in all the excitement:

  • “58 percent of individual stocks since 1926 have failed to outperform one-month Treasury bills over their lifetimes.”
  • “[A] mere 4 percent of the stocks in the entire market … accounted for all of the net market returns from 1926 through 2015.”

Professor Bessembinder’s study concludes that individual stock picks are like lottery tickets. A stock picker may beat the odds and win big, but if you’d rather focus on winning sustainably while managing the risks, you’re better off accepting wider market returns.

On the Dangers of Market-Timing …

On the same day Sommer’s article appeared, The Wall Street Journal’s Jason Zweig published a nicely paired piece, “Sorry, Stock Pickers: History Shows You Underperform in Bad Markets, Too.”

You may need a subscription to read the entire article, but the title says a lot. Based on data points going back to the 1960s, Zweig notes: “The odds of finding a stock picker who can do better in down markets have long been less than 50/50.” Not only are the odds against those who try to beat the market, the costs tend to be high in every market, up or down. So, while stock pickers often tout their ability to shine the brightest when the markets are at their darkest, the evidence again suggests otherwise.

So, What’s New?

Bottom line, a traditional active investor faces hurdles that are simply too tall to be enticing, especially when there is a more logical, evidence-based strategy to lead the way. This may not be breaking news to anyone who’s been following our work for a while, but I’d say it’s still as fresh and relevant as ever.

Back to School at the University of Chicago

Earlier in the month, I attended “AQR University,” held at the University of Chicago and sponsored by fund manager AQR Capital. Given how many Nobel laureates have come out of there (check out that line-up of them on the wall), we know some of the university’s intellectual capital has rubbed off on us. At least it feels that way, based on the fresh perspectives we heard at the event.

University of Chicago professor and author Nicholas Epley was a keynote speaker. I’d read his groundbreaking book, “Mindwise,” but I’d not had the chance to meet him in person.

Me and Dr. Epley

In his presentation, Dr. Epley shared some of his research into how often we try to read one another’s minds. By frequently relying on body language or “perspective-taking,” he explained how and why our understanding of others is often off-base. What’s a better way to figure out what someone else is thinking? Dr. Epley suggests we should just ask.

We also heard from AQR co-founders Cliff Asness and Dave Kabiller. In today’s fast-paced environment in practical and academic financial economics, it’s important for us to regularly “just ask” colleagues and thought leaders what’s on their minds. This is another way we ensure our evidence-based investment strategies remain guided by peer-reviewed best practices.

For more on Cliff’s views, read this Wall Street Journal article about factor investing. In it, he expressed similar sentiments to the ones he shared with us in person.

Want to know what else we learned in Chicago? Just ask!

Featured entries from our Journal

Details Are Part of Our Difference

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

David Booth on How to Choose an Advisor

The One Minute Audio Clip You Need to Hear

Hill Investment Group