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How Could the Behavior Gap Affect Your Investments During This Time of Market Volatility?


About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals. 


“It turns out my job was not to find great investments, but to help create great investors,” writes Carl Richards, author of “The Behavior Gap.”1 From increasing our budget mindfulness to taking a steadier approach to investing, Richards has drawn attention to the way our unexamined behaviors and emotions can be our detriment when it comes to living a happy and financially sound life. If you haven't read The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money by Carl Richards I highly recommend the book. 

In many cases, we make poor financial decisions when experiencing panic or anxiety as a result of personal or widespread events. In the past few weeks, the Coronavirus is one such event that has affected nearly every industry and home as people and governments take action to keep themselves and their community safe. The virus continues to evoke fear and panic as the number of affected individuals rises.

The stock market volatility of 2020 began on Monday, March 9, with history’s largest point plunge for the Dow Jones Industrial Average. On March 16, 2020, the Dow hit a new record. It lost 2,997.10 points to close at 20,188.52, demonstrating the financial effect of this health crisis.2

Whether facing a devastating event or an exciting advancement, people frequently make money decisions as a response. Below we discuss the common financial behaviors driven by such circumstances.

The Behavior Gap Explained 

Coined by Richards, “the behavior gap” refers to the difference between a smart financial decision versus what we actually decide to do. Many people miss out on higher returns because of emotionally driven decisions, creating a gap —  “the behavior gap” — between their lower returns and what they could have earned.

4 Common Emotions that Can Create a Behavior Gap 

#1: Excitement When Stocks Are High 

Whether in a bull market or witnessing the hype from a product release, many investors may feel tempted to increase their risks or attempt to gain from emerging investments when stocks are high. This can lead to investors constantly readjusting their portfolios as the market itself experiences upswings. An investor who follows such patterns is likely to do the same with declines and may end up trying to time the market time and again amidst its inevitable, unpredictable movement.

#2: Fear When Stocks Are Low

As a response to the Coronavirus, the market has seen losses as many investors feel the need to choose more secure investments and avoid uncertain or seemingly unsafe investments.2 When stocks are low, a common response may be to sell and effectively miss out on potential long-term gains. 

#3: Engagement in the Search for Alpha

People yearn to make money and take action to do so. Throughout our lives, this emotional desire is likely a constant one. As such, many seek the help of a financial advisor to procure above-average returns, otherwise known as “alpha.”1 However, in this search for “alpha,” our humanness — our emotions and our behaviors — may lead us astray. Ironically, studies done by DALBAR have calculated the “average investment return” as compared to investor returns and have shown that investor returns are lower.1 The underlying emotional desire and pursuit of money is exactly the recipe for unwise behaviors in response to emotions — but only if left unchecked. 

#4: Short-Term Anxiety and Focus

As humans, viewing aspects of our lives through the lenses of current circumstances is normal. One emotional response to any event, however, is letting the moment consume us, especially if faced with grave consequences —  from our personal health being compromised to the loss of loved ones. Many may find it difficult in these times to both think long-term and to remember logic. However, making a rash decision can inhibit the long-term benefit that comes from maintaining a balanced perspective without reactionary behavior. 

How to Lessen the Behavior Gap for Your Financial Health 

At any given point, the market can go up, down or it can remain the same. While many aspects of the virus are out of our control, one thing we can control right now is how we handle our financial strategy. 

In the past, the market has recovered in response to epidemics with an average of 17.17 percent over time.3 While no two situations are alike, remembering the likelihood of recovery over time — and the market’s nearly inevitable up-and-down movement — can provide a more logical angle to calm the nerves. 

If you’re experiencing financial anxiety in response to the Coronavirus, take a breath and also remember the potential for long-term gains. Of course, you can and should always reach out to your advisor for further clarification and advice. 

Complimentary Portfolio Review

With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It is easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio feel free to send me an e-mail.

Understanding Your Risk Tolerance in a Volatile Market

When you work with Dream Financial Planning, we'll craft a customized investment strategy that aligns with your preferred risk tolerance. Our free quiz evaluates several factors, such as your portfolio size, goals, and risk tolerance. In addition to explaining your risk score, the quiz will also provide insight into how to match your allocation with your preferences, as well as the performance you can expect based on the amount of risk you decide to take in your portfolio.

Riskalyze is one tool we use to help better understand our clients' risk tolerance. In addition, we take time to get to know our clients so we can understand their relationship with money and help them prioritize what's most important to make sure their portfolio matches their needs.

Are you ready for Retirement?

This checklist covers 32 of the most important planning issues to identify and consider for someone who is about to retire. Download our Complimentary guide to make sure you're on track for Retirement.

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  1. https://behaviorgap.com/outperform-99-of-your-neighbors/
  2. https://www.nytimes.com/2020/03/16/business/stock-market-today-coronavirus.html
  3. https://www.marketwatch.com/story/heres-how-the-stock-market-has-performed-during-past-viral-outbreaks-as-chinas-coronavirus-spreads-2020-01-22

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