Some recent studies reported in the Wall Street Journal by Dr. Shlomo Benartzi outline some behavioral traits that investors should be aware of.
Dr. Benartzi, co-head of the behavioral decision-making group at the UCLA Anderson School of Management, identified Narrow Framing as a particularly difficult trait to overcome. Financial mistakes people make are often caused by a fundamental shortcoming: They can’t see the big picture.
Narrow Framing is known as the tendency to see investments without considering the context of the investor’s overall portfolio. Focusing on short-term results can prevent investors from earning the rates of return they need. The good news, Dr. Benartzi reports, is there are some simple steps to minimize the problems from Narrow Framing.
An easy way to avoid missteps from short-term focus is to check on your portfolio less often. These days, it’s easy to get instant updates on the latest swings in the market, and see the effect on your portfolio. Put down the phone or at least don’t access your accounts during the day!
Another important way to reduce Narrow Framing is to aggregate your financial accounts. Most investors have accounts at multiple brokerages, 401(k) plans at work, bank accounts at local banks, etc. Account aggregation will let you see your whole financial picture and help you avoid focusing on the one stock or fund that may be currently at a loss. For IAP clients, we can offer account aggregation-contact us to get started.
Dr. Benartzi concludes that one of the keys to making better financial decisions is to rely on information that reflect the biggest picture possible. The most successful investors do this; and once they see the big picture, they remember not to look at it too often.