If you looked at Twitter or Facebook after UK lost two games in a row last week – on the road to South Carolina and, even worse, at home to Florida – you would think the season was over. Distraught exclamations like, “I’m off the bandwagon”, “Cal’s one and done system doesn’t work” and “We’ll never make the tournament now” dominated the comments. There is a psychological term for this called Momentum Bias. Simply put, we tend to believe when things are going poorly they will continue to go poorly. Similarly, when we’re on a roll, we expect that to continue too. This same behavioral bias affects people’s views of the stock market. These emotions are quite normal and explains part of the value a good financial planner provides – we help remove the emotion from saving and investing by helping clients focus on their long-term goals.
Now, it’s easy to get frustrated with this team. They are talented but terribly inconsistent. Mind-boggling defensives lapses follow occasional flashes of offensive brilliance. We know they are the youngest team in the country because Cal reminds us of this fact whenever he can but compounding this have been injuries to Quade Green and Jarred Vanderbilt. As a result, at times during the Florida game there were players on the floor who hadn’t played as a unit before in a real game….ever. But, this isn’t news to you, dear reader. Even though we know these facts, however, our minds ignore them and only focus on what is in front of our faces – the mistakes and the losses. That is what is called Availability Bias. That is when we focus on the most recent data that is readily available to our brains, rather than taking into account all of the data on this team and this season. Let’s face it, if we beat West Virginia on the road Saturday, the Florida loss will be a distant memory, right?
Momentum Bias and Availability Bias both affect our views of the stock market too. As we watch our accounts grow each month it is quite tempting to believe it will continue that way. Let’s face it, we’re well into a 9-year Bull market. If Availability Bias limits our brains to the most recent data, it is easy to see why we only remember the up and focus less on the possibility the market will decline.
Little more than a year ago a friend of mine moved half of his investments, about $350,000, into cash the day after the election. He was scared to death of the affect he thought a Trump presidency would have on the market and didn’t want to lose money when the market dropped after he took office. In other words, Availability Bias focused him on that small piece of data and he let that data control his emotions. And that focus steered him away from the entire data set showing the economy was already doing well, companies were earning money and he had a long-term goal, not just a one-year window. I told him in the fall that, had he been a client at election time, we would have advised him not to sell his investments and to maintain his course. If he had listened to us, he would have earned about an additional $45,000 during that period.
As financial advisors, we focus on the long-term goals of our clients so they can ignore the daily bombardment of short-term noise we all hear. In short, we help remove the emotion from decisions. Our clients don’t have to worry because they know we’re handling it.
So, listen to me when I say…this team will be just fine. How many of us would gladly accept a loss in the 2nd round of the NCAA Tourney this year if it would mean a Final Four next season? I know I would. So, look at the broad picture, stay calm and focus on the ultimate goal – a 9th National Championship.