Election Mayhem And The Markets – Our Thoughts

Is this really our new world that we are all witnessing? Given what we see on the nightly news, the venom we read on the internet, and the level of acrimony that exists between the two warring sides of the 2020 election, you’d think the end of times are at hand.

Listening to each side with less than six weeks to go, one would assume they live in different countries or even on different planets (supposedly there is life on Venus!)

But in reality, they are watching different cable news channels and reading different websites in an unyielding effort to achieve confirmation bias. It’s as if one cable news channel is always right, and the other guy is always wrong. Does anybody really believe that?

If two cable channels with entirely opposing views are wrong, mislead, or purposely avoid sharing information at least 30% of the time (pick your own estimate, it’s as good as mine), then what portion of their programming is false? Fact checkers to the rescue…well unless they too are biased!

So, our options are these…we can be partially informed, uninformed, or misinformed…what a choice! How is the average voter supposed to decide?

One Thing is Certain…

…Financial markets hate uncertainty.

Polls are telling us something close to what happened in 2016, which is to say they are a function of the assumptions made by pollsters. Who is being sampled? What are they being asked? Who is willing to sit through a polling call? How many questions are being asked? Are the people being polled registered voters? Are they likely voters? Are they telling the truth about who they will vote for? How are they going to vote? When are they going to stop counting the votes? Who gets a ballot mailed to them? What ballots are going to be rejected?

Our job at Modernize Wealth is to try to pick the bones out of all of this…and anticipate how the markets are going to react. Really?

Guided by History

History, as is often the case, gives us clues. We have endured pandemics before, as well as contested elections. Rutherford B Hayes won a heavily contested election in 1876 after losing the popular vote to Samuel J Tilden but winning the electoral college after…wait for it…disputed ballot counts. Sound familiar?

We are spending a fortune to overcome the pandemic, and it may yet bankrupt our nation. We’ve been there before. The US was bankrupt after the Revolutionary War, Civil War, the Panic of 1873, 1893, 1896, 1907, 1910, after World War I, the Great Depression. Too long ago? Some of you may remember 14% unemployment and 21% interest rates in 1980? We should easily recall the Tech Bubble bursting, and the financial panic of 2008? Yet how soon we forget.

So… What Do We Plan to Do?

The team at Modernize Wealth is planning to deal with this potential mess and mayhem by hedging our positions as we get closer to the election to preserve wealth for our clients; then removing our hedge positions as the fog of election mayhem subsides.

We need to recognize that investments will be significantly affected by the eventual outcome, which may not be known for some time after the election. Tax policy, regulations, the Courts, labor policy, foreign policy, education policy, not to mention domestic security are going to be affected by the outcome. Throw in the wild card of COVID-19 vaccines and new treatments, and you’ve got a perfect storm with no clear way to stop it.

Contact Us

Our aim in the coming months is to ride out this perfect storm; to plan for wealth preservation and to look for opportunities when they invariably surface. Caution: this upcoming ride will not be for the faint of heart or the inexperienced investor.

If you would like to share your thoughts on this topic with us, we welcome the discussion! Let’s talk! Call us at 480-346-1283, or email hello@modernizewealth.com and we will schedule a conversation.

Buckle up…2020 has been a year unlike any other….but its not over yet!

Learning how emotions affect decisions can make you a better investor.

Here’s a question for you… “Are you a better-than-average driver?” We all put our hand up in the Modernize Wealth office! (Brandon certainly needs to put his hand back down!)

Chances are, you answered yes. That’s because nearly three-quarters of people think they are better-than-average drivers.[1] Besides being mathematically impossible, this statistic is an example of overconfidence — and is just one illustration of how certain biases can influence our thought patterns.

These behavioral biases sometimes help us make smart decisions. But they also can cloud our judgment and lead us to make irrational decisions. That’s especially true when it comes to investing. At a time when markets are down and it’s impossible to predict what tomorrow will look like, our perceptual distortions can make a difficult situation worse.

The good news is recent evidence suggests that we can learn to overcome these biases and improve our decision-making. But first we have to understand how they work.

Here’s a look at three of the most common behavioral biases that can impair our investment decisions.

Anchoring

You’ve fallen victim to anchoring when your emotional attachment to the past value of an investment keeps you from recognizing its present value. For example, let’s say you own stock that was recently selling for $100 per share but has since dropped to $60. But you may be anchored to that $100 figure, convinced that’s the right value for that stock. As a result, you may hold onto your stock convinced it will soon rebound. However, there’s no guarantee that it will.

When assessing your investments, ask yourself whether your evaluations are based on the current reality of the assets or your past feelings about them. Weigh the merits of keeping an investment based on current information and whether it’s still a good fit for your financial plan.

Recency Bias

Recency bias can lead to putting too much emphasis on the latest information — and often ignoring other important data. For example, say stocks begin to climb and that uptick inspires a surge in buying. As more investors pile on, prices climb even higher, surpassing historically expensive levels. Yet investors may ignore this red flag, assuming recent trends outweigh long-term data. However, bubbles like these can pop and falling prices can potentially leave investors with heavy losses.

You can avoid recency bias by taking a long-term approach to investing. Strategies such as dollar-cost averaging, when you make a series of regular investments regardless of the market’s ups and downs, can help erase the temptation to chase returns or panic when prices fall.

Overconfidence

Confidence is useful and, in many cases, necessary. Investing a chunk of your income in the stock market takes confidence. And it’s confidence that allows you to keep risks in perspective and sit tight in a turbulent market rather than rushing to sell your assets and locking in losses.

But overconfidence can be dangerous. It can lead you to believe that you know better than experts, that you can predict market movements successfully (spoiler: you can’t), or that you can spot investment opportunities others have missed. Worst of all, it can lead to emotional decisions in response to market moves, such as buying when prices are high and selling when prices are low.

Combat a tendency toward overconfidence by basing investment decisions not on emotion, but on careful research. Once you’ve made a decision, stick with it and avoid the temptation to try to outsmart the market by jumping in and out of investments.

Recognize the Issue

Recognizing how behavioral biases influence investing can help you keep them in check. Like any aspect of life, once you recognize an issue, it becomes easier to create a plan to address and overcome it. As a result, you’ll be more likely to make investment decisions that align with your long-term financial plan — and to avoid the irrational decisions that may knock you off track from that plan.

Contact Modernize Wealth

It’s time to set behavioral biases aside and get on the path to creating generational wealth for your family. If you would like our help with creating a financial plan, and then staying on track with your investing, please give us a call at 480.346.1283 to schedule a discovery session, or use our contact form.

Choose to partner with the Modernize Wealth team and you will benefit from the experience of wealth management specialists who can deliver innovative investment strategies, as well as bespoke financial guidance that will help you keep your plans on track.

[1] AAA, “More Americans willing to ride in self-driving cars,” 2018.