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Behavioral Finance Has Become Increasingly Important

I think people generally realize that buying high and selling low isn’t a good strategy.  However, year after year the research shows that individual investors tend to buy asset classes or sectors after periods of strong performance (when valuations are generally higher and expected returns are thus generally lower) and sell after periods of poor performance (when valuations are generally lower and expected returns are thus generally higher).  Often investors are their very own worst enemy.Building a well rounded portfolio with a tilt towards assets, industries and companies that may be undervalued and rebalancing on either a calendar or weighting basis has the potential to be a winning strategy. Of course, investing and rebalancing into undervalued assets, industries and companies often means investing hard earned capital in securities that have recently caused pain and potentially losses.  As you review your portfolio at year-end and position for 2017 and beyond, do you invest by looking through the rear view mirror or through the windshield?  I prefer to look forward, armed with cheap valuations.

Asset allocation and rebalancing does not ensure a profit or protect against a loss and may cause investors to incur tax liabilities and/or transaction costs.  Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Securities offered through LPL Financial, Member FINRA/SIPC.  Investment Advice offered through ADE, LLC, a registered investment advisor.  ADE, LLC and Celestial Wealth Management are separate entities from LPL Financial.

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Comment   |  1 year, 5 months ago from Towson, MD