[MUSIC]

We are now reaching the 3rd stage of our description of the investment decision

process.

Assuming that you have carefully selected the asset classes in which

you would like to invest your wealth.

And that you have correctly computed the optimal investment strategy and

set up a plan.

It's very likely that, at some point in time, you will have to readjust your

portfolio, rebalance your portfolio to get back to for example, a target

proportion of your wealth invested in a particular geographical area or industry.

To do so, you will have to sell some stocks, sell some assets, and

buy more of some you already own, or buy new securities.

Things might go wrong at that stage as well.

And, one particular aspect of this buying selling decision associated to

the rebalancing and readjustment of your portfolio, which might be problematic,

is that typically we tend to value assets that we own very differently than

asset that we are trying to buy or contemplating buying or investing in.

>> This was once again demonstrated by an experiment.

In this experiment,

participants were [INAUDIBLE] in the lab and they were given a mug to look at.

And then they were asked to say how much they would be willing to pay for this mug.

Then a second group of participants was brought into the lab,

given the same mug, and they were told, this mug is yours to keep.

Unless, you would like to sell it back to me.

How much would I have to give you to give up the mug?

What was interesting in this experiment, is that when they compared the prices

that the participants gave, they actually differed.

Those people were selling the mug asked on average for

a price that was twice as high as those people who were given the opportunity to

buy the mug despite the fact that this was the same mug.

So, the price should actually be independent of whether you're buying or

selling it.

This is called the endowment effect, which basically means that we value things that

we already own more than the things that we do not own.

Sometimes this is also referred to as the status quo effect.

>> The status quo effect might be related to what we call the fear of regret.

Giving up or passing a profitable investment of opportunity

is not the same as selling a winning stock, for example.

Consider the following situation.

You would probably regret much more selling an Apple stock 20 years ago,

remember that Apple has had tremendous success over the past 20 years,

than passing up an opportunity to invest in Google 20 years ago.

Even though the two investment might have been relatively similar.

You would regret more changing your portfolio and not benefiting from a gain

than passing an investment opportunity that would have been just as profitable.

>> And this fear of regret is also thought to be one of the driving factors behind

our next bias, which is called the disposition effect.

The disposition effect means that people have a tendency to

cash in on gains too early, and to hold onto losses for too long.

Think about the following situation.

All right, you've invested in a stock and it's doubled.

And now you are afraid that the stock might fall again.

So you aren't going to cash in based on the fact that it has already doubled.

This way of thinking is not the right way to

think about how good your stock is at this moment.

What you really should be looking at is, if you didn't own the stock right now,

would you actually invest in it right now?

Would add it to portfolio?

And if the answer is yes, you should hold on to that stock and not sell it.

The same goes for your losses.

If a stock has lost quite a bit of money, often people think,

well, it's probably going to rebound eventually.

But again, here you're comparing the current value of the stock to the price at

which you originally purchased.

And that of course has nothing to do with the future performance of the company.

So again, you should look at the stock and

ask yourself, if it wasn't part of my portfolio right now, would I add it

to my portfolio right now based on the information I have about the company?

And the same idea goes, if the answer is yes, you can hold on to a losing stock.

If the answer is, no, you should probably sell it.

>> To summarize, at this stage of the investment process, when rebalancing or

readjusting your portfolio to stick to your initial investment strategy,

you should really not consider a buy or

a sell with respect to the recent loss or recent gain it entails.

You should follow the initial plan you have established and

adjust your portfolio accordingly.

[MUSIC]

Cognitive biases when rebalancing your portfolio

Planning your Client's Wealth over a 5-year Horizon

与讲师见面