Why Investors Do Dumb Things (And How Advisors Can Prevent That)

What do we fear and why regarding investments, and how does this fear impact the performance of financial professionals whether as fiduciaries or as asset managers?

Those existential questions posed by Barry Ritholtz began a session on Thursday at the Morningstar ETF Conference in Chicago that took a winding yet entertaining path filled with similes and market charts to illustrate his answer.

Before delving into the markets, Ritholtz, co-founder and chief investment officer of Ritholtz Wealth Management in New York City, asked the question of why people fear sharks when, at least according to statistics from 2015, more people around the world were killed by taking selfies (12) that year than by sharks (8).

“That goes to show that anything that’s big and visceral and emotional and looks good on TV will capture our attention even if statistically it’s not a significant source of how actual deaths appear,” he said.

The same goes for terrorism, which Ritholtz emphasized he wasn’t making light of but noted that it’s something that produces an emotional response. But according to the Centers for Disease Control and Prevention, people are 35,000 times more likely to die of heart disease and 34,000 times more likely to die of cancer than they are from a terrorist attack.

“The parallels with your portfolios are the same. It’s not the big scary things that will get your portfolio and it’s not the big scary things that will get you,” Ritholtz said. “It’s probably the high cholesterol and high blood pressure. But what we’re afraid of is the big, emotional visceral events that we see on TV.

“What we always need to keep in mind is that emotional decision making makes for bad decisions and bad outcomes,” he added.

Whether if relates to sharks or terrorist attacks or investment portfolios, you have to look at the numbers and put them into context, said Ritholtz, who proceeded to list the things that investors are afraid of concerning the markets. Tops on the list are the fears of market crashes, hyperinflation and the collapse of the dollar. And those fears are often heightened by a steady drumbeat of negative reports in the media, such as during the financial crisis of ’08-’09. 

“When you were presented with what could be described as the best opportunity in our lifetimes to buy stocks, all the news reports were completely negative,” Ritholtz said.

He called up a chart showing all of the significant declines in the S&P 500 Index during the past century, of which there are about 25. “Anybody who says they don’t want to put money into the market because they think it’s going to crash should never be in equities because the market always crashes, there’s always a 20 percent correction coming because based on the past century there’s one on average every five years,” Ritholtz said.