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Don’t Sweat The Stock Market’s Volatility

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

The stock market has taken investors on a rollercoaster ride over the past few weeks, jangling plenty of nerves in the process.

In times like these, looking at some historical perspective can go a long way toward easing investors' minds. Specifically, let's look at market corrections, which are said to occur when the market falls 10% from a recent high point.

Market declines of 10% occur, on average, once per year, according to research by JP Morgan Asset Management. And drawdowns of 20% take place once per market cycle.

The bottom line is that corrections are completely normal. They're part of the process that, over time, keeps the prices of stocks in line with their fundamental value based on earnings and other factors. You might think of corrections as a pressure valve, keeping the market from expanding into a dangerous bubble.

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Behavioral Biases: What Makes Your Brain Trick?

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

In last month's blog, we discussed the deep-seated "fight or flight" instincts that that trick us into making significant money-management mistakes. Now let's take a look at a half-dozen of the behavioral biases that arise from our wiring, and how they can sabotage even the best-laid investment plans.

Behavioral Bias #1: Herd Mentality

Herd mentality is what happens to you when you see a market movement afoot and rush to join the stampede. The herd may be hurtling toward what seems like a hot buying opportunity, such as a "next big thing" stock. Or it may be fleeing a perceived risk, such as a country in economic turmoil. Either way, as we covered in "Ignoring the Siren Song of Daily Market Pricing," following the herd puts you on a dangerous path toward buying high, selling low and incurring unnecessary expenses.

Behavioral Bias #2: Recency

Your long-term plans are also at risk when you succumb to the tendency to give undue weight to recent information. In "What Drives Market Returns?" we learned that stocks have historically delivered premium returns over bonds. Whenever stock markets dip downward, though, we typically see recency bias at play, as droves of investors sell their stocks to seek "safe harbors." In a roaring bull market, they reverse course and buy.

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The Human Factor in Evidence-Based Investing

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

Over the past several months, our blog series on evidence-based investing has explored the ways we can use stock and bond market factors to help drive an effective investment strategy.

We turn now to what is arguably the most significant factor in evidence-based investing: the human factor.

Despite everything we know about efficient capital markets and all the solid evidence available to guide our rational decisions, we're still human. We've got things going on in our heads that have nothing to do with solid evidence and rational decisions—a brew of instincts and emotions that spur us to leap before looking.

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What Has Evidence-Based Investing Done for Me Lately?

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

In last month's blog, "Factors That Figure in Your Evidence-Based Portfolio," we discussed key factors that are used in constructing evidence-based investment portfolios. Now let's look at a few additional ones—and why incorporating them into a portfolio can be tricky.

First, a quick reminder that the three well-established stock market factors are equity, value and small-cap. For bonds, the key factors are term and credit. These factors have formed the backbone of evidence-based portfolio construction, helping investors strike the most effective balance between return and risk.

Continued research has found additional market factors that provide the potential for additional premiums. As with the earlier factors, these premiums seem to result from accepting added market risk, avoiding ill-advised investor behaviors or both. In academic circles, the most prominent among these are considered to be profitability and momentum.

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Factors That Figure in Your Evidence-Based Portfolio

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

If you're a reader of our blogs, you know we're proponents of evidence-based investing: The practice of grounding investment strategy in rational methodology.

Evidence-based investing strengthens your ability to stay on course toward your financial goals by understanding and using the factors that drive investment returns.

A body of research dating back to the 1950s has identified three factors that have formed the backbone for evidence-based portfolio construction: