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Cartman was just left half of his grandmother’s estate after shedied. Since he isn’t really sure what to do with his newfoundwealth, he decides to work with a financial planner. As a part ofthe financial plan, the advisor recommends adjusting his inheritedportfolio of C.D.’s and T-bills into an investment policy that moreclosely resembles Cartman’s goals, risk tolerance, and timehorizon. Although Cartman sees how this would normally make sense,he told the advisor he preferred to keep things “as is,” becausethis money was his grandmother’s, and she seemed to do ok. Or inCartman’s words, she did “cooo.” So, instead of realigning theinvestments to better match Cartman’s situation, he just keptthings the way they were. 1) What behavior/bias is present? 2) Whyis this behavior detrimental? 3) What could have been donedifferently, or what could be done differently next time to avoidthis result?

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Beverley Smith
Beverley SmithLv2
28 Sep 2019

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Scenario #6: Heidi has always been a real estate investor. Shetells her financial planner that, because she is such an expert,it’s the only asset worth investing in. However, after a thoroughassessment of Heidi’s actual performance, net of costs, her rate ofreturn over time has been about 3.5%/yr on her real estateinvesting. This is not a bad return, but her planner shows her thatdiversifying her assets into other investments will not only earnher more return over the long-term, but also reduce her risk(because real estate will not always perform well, and other assetsmay-when real estate does not do so well). Heidi just can’t believethat something she is so comfortable with could not be as optimalas what her planner is proposing. 1) What behavior/bias is present?2) Why is this behavior detrimental? 3) What could have been donedifferently, or what could be done differently next time to avoidthis result?

Scenario #1: Kenny is ready to implement the investment policyportion of his financial plan. After months of dragging his feet,he began by allocating into a well-diversified portfolio that hisfinancial planner artfully crafted for him, across a myriad ofasset classes. Days after he invested into his portfolio, inaccordance with his long-term goals and risk profile, the stockmarket suffered a big drop. The economy wasn’t in peril, or even arecession, but the market just experienced a normal,run-of-the-mill “correction” that happens from time to time overthe short-term. Even though Kenny’s portfolio only has about 50% ofits assets in stocks, he is scared. He feels like he has just beenthrough the ringer, and he is only a few weeks into his long-termplan! How could this be? His planner told him that there would be“days like this,” that his plan is built for the long-term, and itis inline with his goals and risk tolerance. Further, he told Kennythat he will only experience about half of the downside as thestock market itself (since half of his portfolio is out of thestock market), yet he still feels like he made a bad decision. Hewants to sell everything at once, so he picks up the phone, screamsat his planner, and forces him to sell everything that just wentdown. 1) What behavior/bias is present? 2) Why is this behaviordetrimental? 3) What could have been done differently, or whatcould be done differently next time to avoid this result?

Scenario # 2: Kyle has a carefully-constructed financial planthat he and his planner have used for the last decade. However, thecurrent recession is causing him some added angst. Stan, hisfinancial planner, can’t seem to understand why. After reallytrying to get at the root of Kyle’s stress, he finally explainedhis core issue. His net worth had dropped below $1 million inassets. Even though this was and arbitrary number, and Kyle’ssubsequent net worth dipping below this value had no impact on hisoverall financial plan, he pushed the panic button. He demandedthat Stan sell all of his assets and move into cash. Additionally,Kyle was going to put his house on the market and move, even thoughreal estate prices were also depressed and moving was not one ofhis personal goals. Stan tried to get Kyle to understand themistake(s) he was about to make, and that his net worth fallingbelow a certain amount was inconsequential, but he just would notlisten and forced Stan to sell his holdings. Kyle subsequently puthis house on the market, sold it for about 25% less than what hepaid for it five years prior, and moved to a remote town inTennessee, where his “cost of living” would be lower (although hedid not really want to move there personally).

1) What behavior/bias is present? 2) Why is this behaviordetrimental? 3) What could have been done differently, or whatcould be done differently next time to avoid this result?

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