Morningstar Investment Conference 2018: Finding Profit In Psychology

Morningstar Investment Conference 2018: Finding Profit In Psychology

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Investors take note of behavioral economics for the wrong reasons, Morningstar behavioral economist Sarah Newcomb said on Tuesday morning at the Morningstar Investment Conference 2018, as she hosted a question-and-answer conversation with Nobel laureate Daniel Kahneman. She added, “It’s as if they say, ‘People are predictably irrational? Great! How do we (investors) profit from that?'”


She added, “And I think that is exactly the wrong lesson to take from the (research into behavioral economics) work.” Her point was that rather than seeking to profit from people’s predictable irrationality, people should focus on correcting their own investment decision-making flaws.

Kahneman, a Nobel Prize-winning psychologist, also suggested answers in the keynote Q&A session that launched the second day of the flagship conference for financial advisors in Chicago. The most practical approach, Kahneman said, is advising clients not to fight human nature, to avoid seeking a level of objective decision-making that may not be attainable.

Instead, Kahneman said, consider recommending to clients that they divide their portfolio into two segments — or buckets. People would not be tempted to sell either bucket in a volatile market as the discomfort of losses in one bucket would be eased by gains in the other.

That would help investors resist changing the asset allocation they have targeted. Changing asset allocation in mid course is a mistake, he said.

It’s the advisor’s responsibility to explain the reasons for adopting such a two-bucket strategy, Newcomb said.

To figure out how large each segment of a two-bucket portfolio should be, an advisor “must talk with a client to determine his needs and goals, especially in times of (market) crisis,” Kahneman said.

Retirement Panel

Following the Kahneman keynote, a panel discussed trends in retirement-planning research.

The panel of Morningstar experts discussed strengths and weaknesses of target-date funds. Advisors can serve clients by explaining target-date fund glidepaths, said Jeff Holt, Morningstar’s director of multi-asset and alternative strategies.

Christine Benz, who moderated the discussion, urged advisors to recommend to clients that they use both Roth and traditional IRAs and 401(k)s. That mix provides tax diversification during withdrawals in retirement.


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