Over-confidence

Continuing within the theme of behavioral finance, which has become more and more relevant with all of the many variables being thrown at us portfolio managers these days as we try to deal with all of the new naratives (economic and political) being presented to us on an almost daily basis.

One of the great difficulties is determining which are true and which are false (or perhaps, "alternative truths").

In my Sunday blog, I alluded to a situation where expectations of somewhat unrealistic returns occurs because there is a belief that what has been over the last few years (stock market resilience) will continue on into the future indefinitely. That is where the narrative of "company earnings don't matter to stock markets, just central bank liquidity" resides. On yesterdays High Rock monthly video, we also brought up the story of a client who, in the violence of the plunge in stock markets in 2018, became so unglued as to request that their portfolio be moved to 100% cash. Clearly, both these situations involve(d) levels of confidence in their views that are / were off the charts (i.e. not considering the risks of either being overly invested in stocks or not invested at all, relative to their long-term goals).

Another Nobel prize winning economist, Daniel Kahneman, professor emeritus of psychology and public affairs at Princeton University's Woodrow Wilson School and who, in 2015, was listed as the seventh most influential economist in the world by The Economist has this to say:

Video link click here

People, he claims, are pulled in opposite directions: they have an aversion to loss, but are optimistic. Loss aversion and over-confidence work in opposite directions.

Confidence sells. That is why BMO's Brian Belski (Chief Investment Strategist) tells BNN/Bloomberg that he sees 10 more years of bull markets. They want your business and they want you to believe! BNN /Bloomberg wants you to believe too, because it keeps you tuned in. Excitement!

But Prof. Kahneman says he wouldn't want a financial advisor who was an optimist. (read: is a salesperson).

Why? Investment advice is not supposed to be exciting. It is supposed to be well thought out long-term planning that will get you to your ultimate financial goals. Rolling the dice with all your money in any stock index fund or ETF is nothing other than gambling. And we know the "house" always wins when it comes to gambling.

As I will always say: "why take risk that you don't have to?". Over-confidence may blind you from a proper assessment of risk.

Again, to reiterate from Sunday's blog: beware the agenda of the super confident, in their perspective lurks a boat-load of unaccounted for risk.

At High Rock, at least for our own portfolios and a good majority of our client's portfolios, we manage risk first. We prepare a Wealth Forecast from which we develop a long-term strategy. That strategy is always flexible, subject to review as circumstances change. Circumstances may include an increase in tolerance to risk. However, we will always present our informed opinions in order to properly coach and counsel client risk.

We are also held to the CFA Institute standard of suitability as per our Voluntary Code of Conduct which in its intent holds us accountable for ensuring that a client's portfolio is suitable for a client's financial situation.