Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
I have long given up believing that investors are “rational” as I was taught in college. As a Finance major, I learned that investors are rational and make decisions in their own best interest. People don’t voluntarily make decisions that do not favor them, I was told, but rather “optimize” their decisions to benefit themselves. HA!
Some new research from Bankrate.com would leave some college professors scratching their heads. The survey asked 1,000 individuals about their investing preferences for 2019 for money that they would be investing for more than 10 years. Obvious categories were Stocks, Cash, Real Estate, Gold, etc. (Real Estate was #1 for 2019, by the way). What was really interesting, however, was a question about how falling interest rates would affect their investing decisions. Now for a “Rational Investor” falling interest rates should have a profound effect on where they put their money for 10 years or longer, just as rising interest rates should affect such a decision. Entire financial empires wobble on whether the Federal Reserve Board will raise or lower interest rates by even tiny percentages, for example. Certainly, a rational investor would factor declining interest rates into their investment decisions for the long term, right?
Nope. Not going to happen. According to BankRate.com’s research, the survey respondents would make almost no changes to their investments in a declining interest rate environment. It appears that people pick a preferred investment and then decide to stay with it regardless of what is happening around it that would impact their long-term returns. In fact, only 33% of the respondents said that if interest rates were declining would they put more money into the stock market. 67% of the respondents are “not rational.” Surprise!
So, what can we make of this information? If people should be making changes to their long-term investments as a result of macro changes in the economy, and the vast majority won’t, we obviously can’t rely on people making their own decisions in their best interest. Rather, the obvious takeaway for me is that investors need to have some distance from their investments and the decisions on those investments. What does this distance look like? To me, it looks like a competent investment advisor. Someone skilled in taking the emotions out of the decisions and applying financial analysis to the situation. It looks like someone who will act in your best interest. I guess, it looks sort of like me. Give me a call so we can discuss your situation.