The Belief-Reactivity Hypothesis

The reason most Americans continue along a self destructive course towards financial disaster has nothing to do with investment returns. Yes, returns matter but they pale in comparison to what you believe, your internal operating system that determines how you actually save, (or even if you save), and invest. These beliefs ultimately impact the choices you make and how well, (or how poorly), you stick to these decisions.

Based on thousands of observations over the past thirty years, I have coined what I call The Belief-Reactivity Hypothesis. The primary tenant of this hypothesis is that the stronger the belief, the more likely there will be a strong reaction at an inopportune time. For instance, someone who believes that the stock market is priced too high, will be ultra sensitive to stock market changes and will likely jump out of the market with normal short term volatility. This folds over into missing longer term market movements, which of course usually means lower returns. This vicious cycle repeats itself over and over. Financial goals are achieved through intentional action, not reaction.

The underpinning for most erroneous financial beliefs is a fear of losing invested capital. The truth is, (at least all we know with over 90 years of detailed market data), that permanent losses are created by investors, not by markets. Behavior, misconceptions and erroneous beliefs can overwhelm the long-term up trend in the stock market and subsequently turn gains into losses.

The actions that you take are the result of the decisions that you make. The reason for the decisions can be traced directly back to what you believe.

As fiduciary advisors, we focus on helping clients embrace market pricing and to accept the returns of the market. Trying to “beat the market” leads many investors astray. If beliefs don’t change, outcomes don’t change. Most of what is written each day about finance has nothing to do with this errant, embedded belief system. It is assumed that somehow, individuals can filter out the conflicted, commercialized messages to foster some reasonable approximation of functional personal economics. That simply isn’t true.

Yes, it’s a tall order to change what you believe and that is where behavioral coaching comes into play. Very few individuals can consistently manage to overcome the long list of belief and behavioral biases on their own. What do you believe? Ready for a real conversation?

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