Investment Behavior- Do Your Genes Control You?

Economists assume people act rationally. Bad assumption. Investors often don’t act the way they should. There is a long list of investment biases and many people are born with them. Five of the major follies of investing are 1) the reluctance to realize losses, 2) chasing performance, 3) insufficient diversification, 4) excessive trading, and 5) non-objective evaluation of risk and reward.

The recent report, “Why Do Individuals Exhibit Investment Biases?” researched and written by Henrik Cronqvist and Stephan Siegel illustrates how genes impact investment decisions.

Investment Behavior- Do Your Genes Control You?Economists assume people act rationally. Bad assumption. Investors often don’t act the way they should. There is a long list of investment biases and many people are born with them. Five of the major follies of investing are 1) the reluctance to realize losses, 2) chasing performance, 3) insufficient diversification, 4) excessive trading, and 5) non-objective evaluation of risk and reward.

The recent report, “Why Do Individuals Exhibit Investment Biases?” researched and written by Henrik Cronqvist and Stephan Siegel illustrates how genes impact investment decisions.

Their research was based on analysis of investment decisions made by identical twins in Sweden. They selected Sweden for two reasons. First, the Swedish Twin Registry (“STR”) is the world’s largest twin registry. Swedish twins are registered at birth and STR collects additional data through in-depth interviews. In particular, Cronqvist and Siegel wanted to focus on identical twins with identical genes rather than include fraternal twins, who share only 50% of their genes. Furthermore, until 2007 taxpayers in Sweden were subject to a wealth tax based on investment assets. Information about individual portfolios including holdings and sales was required to be filed with the Swedish Tax Authorities annually from 1999 to 2007.

Cronqvist and Siegel selected 15,208 pairs of identical twins and tracked their investment behavior using the wealth tax data. Controlling for various factors, they found that identical twins were more similar in their investment behavior than fraternal twins.

They also found that twins who had a “home” bias in investing also had a home basis in other ways. A home bias in investing typically would means that the individual would rather own stock in Swedish companies rather than stocks of foreign companies. Hence, this portfolio probably had insufficient diversification. Twins showing this bias also showed a preference for living closer to their place of birth and for marrying a spouse from their region of the country.

The researchers concluded that genes explain up to half the variation in investment behavior. They also looked into other factors. In particular, they reviewed education as a possible influence in investment behavior. Earlier research has shown that education reduces expressions of genetic predispositions to poor health. A baby born with bad health genes can overcome this deficiency with education and discipline. This is not the case with investment behavior. Cronqvist and Siegel found that education was not a significant moderator of genetic investment biases.

So, there you have it. Some lousy investors now have a new excuse. Their genes “made them do it.” Fortunately, financial advisors like DWM are here for many reasons; one of which is to help individuals make rational investment decisions regardless of their genes.

Will you be able to celebrate your century mark?

Lester Detterbeck of Detterbeck Wealth ManagementFrom the Charleston Mercury today:

“You’re invited to my 100th birthday party, so mark it down: Nov. 20, 2047 – only 35 years from now. This isn’t a joke. Recent studies show that Americans are living longer. It’s likely I will reach 100. Will you? And, if you do, will your savings last that long too? “

 Click here to read my latest contribution to the Charleston Mercury.

 

Email and website announcement

As of today, our emails are changing. As you know, DWM has been busy in the last year. DWM Financial Group was formerly the parent company for two divisions: DWM Investment Management and Detterbeck Wealth Management. In 2011 we divested DWM Investment Management, our third party money management division, so we could focus solely on clients and prospects of Detterbeck Wealth Management.

In conjunction with this change, we recently overhauled our website at www.dwmgmt.com. We’re very proud of it and if you haven’t seen it yet, we invite you to take a look.

Hence we’re changing our emails from @dwmfnclgroup.com to @dwmgmt.com. To avoid possible issues with your spam filter, please be sure to update your contact records to assure further communication from DWM!

Sincerely,
Detterbeck Wealth Management
Les@dwmgmt.com
Brett@dwmgmt.com
Amy@dwmgmt.com
Jenny@dwmgmt.com

NAPFA Press Release

Local Financial Advisor Joins Leading Association of Fee-Only Financial Planners: Brett M. Detterbeck of Detterbeck Wealth Management accepted for membership in the National Association of Personal Financial Advisors (NAPFA)

ARLINGTON HEIGHTS, IL- Brett M. Detterbeck of Detterbeck Wealth Management in Palatine, IL has been accepted for membership in the NATIONAL ASSOCIATION OF PERSONAL FINANCIAL ADVISORS (NAPFA). With membership, Detterbeck becomes affiliated with an organization of more than 1,500 of the most­ qualified financial advisors in the nation, as well as 900 other allied professionals.

Membership in NAPFA and the NAPFA-Registered Financial Advisor designation are only available to Fee­ Only advisors who meet NAPFA’s stringent qualifications. Those standards prohibit the acceptance of commissions and sales related compensation, require advisors to act in clients’ best interests at all times, and to offer comprehensive planning services. NAPFA is also known for having the industry’s most rigorous education and training requirements. Candidates for NAPFA-Registered Financial Advisor status are required to submit a comprehensive financial plan for a peer review.

To read more, please click here.

 

Ben Bernanke’s Latest Report to Congress

Ben Bernanke reportOn February 29th, Federal Reserve Chairman Ben Bernanke gave his biannual “Humphrey-Hawkins” report on monetary policy to Congress. In short, Mr. Bernanke testified that the “recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards.”

Mr. Bernanke noted recent “positive developments in the labor market” but said that the job market remains “far from normal.” He indicated very little worry about inflation even with the recent rise in energy prices. He pointed to advanced household spending in 2011, even though “the fundamentals that support spending continue to be weak: real household income and wealth were flat in 2011 and access to credit remained restricted for many potential borrowers.”

In the housing sector, he testified that affordability has increased, however many potential buyers lack the down payment and credit history to qualify for loans and others are reluctant to buy due to their concerns about “their income, employment prospects and the future path of home prices.” Mr. Bernanke outlined increases in manufacturing production and capital expenditures, yet indicated that the consensus of the Federal Open Market Committee is that GDP will increase overall by only 2.5% in 2012. 

Mr. Bernanke indicated that the target range for the federal funds rate remains at 0-1/4% and is expected to stay near that until the end of 2014. If so, mortgage rates should stay low and C.D. rates will be just slightly above zero for the next three years. He left the door open to a new program of mortgage-bond purchases to drive long-term rates even lower.

The Fed Chairman testified that a number of “constructive policy actions have been taken of late in Europe”. He continued, “We are in frequent contact with our counterparts in Europe and will continue to follow the situation closely.” One day after Mr. Bernanke’s testimony, the Euro-zone finance ministers said they were ready to give Greece the money it needs provided a bond swap that will cut the debt Greece owes it private creditors goes according to plan this week. At the same time, European economic data released on March 1st was grim. Overall unemployment hit a 15 year high, while inflation unexpectedly accelerated.

Zanny Minton Beddoes, of the Economist speaking on NPR’s Morning Edition last week, put the potential impact of the European problems on the America recovery this way: “In the past few months, the Europeans have successfully covered their festering sore with a massive, great Band-Aid. And, now the acute crisis has turned into a chronic one. With that, we can take off the table the risk of a financial catastrophe in Europe.” Let’s hope so. We’d like to keep the momentum going on our current U.S. recovery.

For more information: http://www.telegraph.co.uk/finance/economics/9113704/Ben-Bernankes-monetary-policy-report-to-Congress.html