Go to Top

Investing Fundamentals (Podcast)

Something Personal Episode 9: Investing Fundamentals

Something Personal logo. This episode compares investing to many things, from roller coasters to maintaining a healthy diet. But what do you really need to know to make wise investment choices? And why do even financial professionals sometimes struggle to make prudent choices with their own money? Benjamin C. Sullivan, CFP®, CVA, EA, breaks down the fundamentals of investing in this wide-ranging conversation. Ben and host Amy Laburda also discuss some of the common biases that can trip us up when we try to make sound investment decisions. Investing isn’t always easy, but it doesn’t have to be complicated. Listen in to learn more.


About the Guest

thumbnail of Ben Sullivan headshot. Benjamin C. Sullivan, CFP®, CVA, EA, joined the Palisades Hudson staff in early 2007 and became a manager in 2010. In 2016, he established the firm’s branch office in Austin, Texas, where he currently resides. A native of East Hanover, New Jersey, Ben graduated magna cum laude from Tulane University’s Freeman School of Business with a degree in finance and legal studies in business. He is among the authors of the firm's book Looking Ahead: Life, Family, Wealth and Business After 55. This episode draws from his work on Chapter 16, "Investment Psychology." For Ben's full biography, click here.

Episode Transcript (click arrow to expand)

Amy Laburda 00:05
Welcome to “Something Personal,” the personal finance podcast where we usually seem to talk about death, but today we're talking about mind games. I'm Amy Laburda, the editorial manager at Palisades Hudson Financial Group. Joining me today is my colleague, senior client service manager Ben Sullivan. Thanks for joining me, Ben.

Ben Sullivan
Thanks for having me, Amy.

Amy Laburda
So in our firm's book, Looking Ahead, you wrote about investment and about investment psychology, is that right?

Ben Sullivan
Yeah, that's right.

Amy Laburda 00:34
So let's start with the basics, assuming people listening may have all kinds of backgrounds. Some may be more experienced investors, some may just be getting started. What are some of the things that you would want people sort of across the spectrum of experience to be thinking about with investing?

Ben Sullivan
So there's really no one-size-fits-all approach to investing. The correct strategy is based on your goals and priorities. Do you need immediate access to your money for current spending, or are you saving for an intermediate term

need like buying a house or funding your children's college education, or are you growing wealth over a longer period of time for retirement?

Amy Laburda
Sounds like a lot of people might have more than one of those goals in mind. Is that right?

Ben Sullivan
Yeah, basically no one has just one goal for their money. It's always kind of competing interests that you're looking at.

Amy Laburda
So if you're thinking about different goals with your money, what sort of framework would you usually expect your clients to use, or advise them to use?

Ben Sullivan 01:31
So the most basic framework I use to help clients understand how to think about investments is based on the time frame for when they need to access the money under, basically, the expected case. And then also — life never happens as you plan. Sometimes you're preparing for a podcast and your computer takes a while to restart.

Amy Laburda

Ben Sullivan
But there's always some kind of surprise that comes up. And so you want to plan for the expected case but also be prepared for when things come up.

Amy Laburda 01:58
So how does that play into time frames of investments?

Ben Sullivan
So that is really the way I think about investing. So people think that younger investors are more aggressive than older investors, but it's really the time frame until when you need to access the money that really matters on how aggressive you can be with pursuing a goal.

Amy Laburda
Makes sense. So, then, are you going to be sort of thinking about, obviously, retirement for a younger investor is further away than for an older investor?

But even with a younger investor, presumably you might want to buy your first house before you retire. That's sort of the way you're thinking about it?

Ben Sullivan
Exactly. So if I'm trying to invest for one specific goal that's a near-term goal, I'm not going to invest in the same manner as I would invest if it's a longer-term goal.

Amy Laburda
So other than time frame, what are some other factors that you're looking at?

Ben Sullivan
So I also try to think about the client's risk tolerance, which is a much harder area to get into, because it's this amorphous topic where … How do you really characterize what someone’s

risk tolerance is? It's only after the fact that you really know what their risk tolerance is. It's when the market has been tanking over a recent time frame, and the client is panicking, that tells you that the client was probably a little bit too aggressive to begin with. It's natural to have some fear of the fluctuation of the stock market. But really, it's … If someone cannot handle the fluctuations of the market, they didn't have the proper asset allocation to begin with.

And it comes back to understanding that time frames of when you're going to need the money. So again, getting back to that, why do we think about time frames? And why is that kind of the area that I focus on the most when I'm building a financial plan? It's because you don't know what's going to happen in the short term in investing, especially riskier investments. Over shorter periods of time, they're less predictable than over longer periods of time.

Amy Laburda
Makes sense. I think kind of, with

assessing risk, it's like you don't really know if you like roller coasters until you've ridden your first roller coaster, and then you know if you like it or if you really did not.

Ben Sullivan
That’s a great analogy. People use that analogy all the time, but it's also one of those things where — you don't think about getting off the roller coaster while you're on the roller coaster. You have to prepare in advance and see the loops, see the ups and downs that might happen, kind of visualize those in advance, and then decide whether you want to get on that roller coaster or not.

Some people want the roller coaster. Other people want a more predictable ride that might not be as adventurous. It might not hit the same thrill-seeking urge, but if you can ride a ride that's comfortable for you, you're going to have a better time.

Amy Laburda
So it's a bit of a cliche to say “high risk, high reward.” Is that an aphorism that applies to investing, in your experience?

Ben Sullivan
So the way I think about risk and return is: Definitely high risk can lead to high returns, but it's

by no means any guarantee of high returns. It’s kind of … you have the potential, but you also have a large probability that things can go astray when you're taking on high risks. So tying it back to time frame, you don't want to take on large risks for money that you're going to need in the near term. So that's one way of managing risk, is to not take on the risk that you really can't handle.

Amy Laburda
All right, so, we are talking about

different kinds of risk, and we are talking about different kinds of time frames for different investing goals. How do you think about marrying different kinds of risks with different kinds of time frames, and why do you think about that as an investment adviser?

Ben Sullivan
So, different types of investments have different risk characteristics and behave [in] different ways in the short term versus the long term. So, if we're talking about stocks, stock markets are unpredictable in the short term but slightly more predictable over longer periods of time.

So that's really one of the frameworks that I use to try to explain to clients how to compare the level of risk of a portfolio over the short term versus the long term. So over the short term, there's a really wide range of possibilities in the stock market. So over a one-year period, the range of possible stock returns is somewhere from about 61% positive returns over a one-year basis to 43% negative returns over a one-year basis.

So it's almost as much gambling as it is investing, over short periods of time. And I don't want my clients gambling with money that they need for short-term expenses. So that's not what we try to do. What we try to do is only be investing in the stock market over longer periods of time, because the range of returns for a stock portfolio shrinks to be a finer and finer range of returns as you get longer. So while it's between 61% and negative 43% over one year,

over five years, that gets to between 29% and negative 6% potential returns, based on what the S&P 500 has done historically. So it's a much finer range of returns. And then also, when you're thinking about the probability of experiencing a positive rate of return in the stock market historically, over a one-year period, there's a 77% chance that the S&P 500 is going to have positive returns, which is pretty good. So

you're betting on a winning bet. But over a five-year period, there's over a 92% chance that there's going to be positive rates of return. And if you extend your time horizon even further, to 10 years, there's a 97% probability historically that there's going to be positive returns in the stock market. So everyone's scared; everyone sees the stock market fluctuating over the short term. And when you're kind of looking at that hill that's right in front of you,

or dropping that initial drop of the roller coaster, it's really scary. But if you realize that over the long term, it's a lot more predictable and there's a smaller range of possible returns, it's not quite so scary.

Amy Laburda
So for short-term needs, that one-year kind of thing that you were talking about, you don't want it in stocks. Are you usually talking about bonds and bond funds then? Or do you recommend other things for the really short term?

Ben Sullivan 08:13
Right. So building — the building blocks of a portfolio include cash, cash-like investments, bonds, short-term bonds, long-term bonds, stocks. All of these different parts are building blocks to the portfolio. And like you were mentioning, yes, bonds and cash would be more appropriate investments for the short term. While they don't have as high of a return potential as stocks, they're a lot more predictable.

And there's very little chance, especially if you're investing in short-term bonds or money market funds, that you're going to lose money over that short period of time. So you give up some upside, but you protect against the downside. And that's kind of how we structure portfolios based on the timing of when the cash is going to be needed.

Amy Laburda
So pretty much everyone will have a portfolio that's some combination of these, right? No one is going to be all stocks or all bonds.

Ben Sullivan 09:06
Right. Yeah. No one. Well, I guess there are. They never say no one, never say never.

Amy Laburda
Fair enough.

Ben Sullivan
It's always… If someone is highly risk-averse, maybe they're not going to behave appropriately if they have any stock exposure. They might sell it when the market's down. So you don't want to give them that stock exposure. But assuming rational people, assuming people who are guided well, then yes, everyone is going to have some exposure to stock and some exposure to bonds.

Amy Laburda 09:34
So as a rule of thumb, people who are a little more into the thrill of the roller coaster might get a little more aggressive. Some people who are a little more risk-averse might shy away. But in general, it's more tuning the mix than picking one or the other.

Ben Sullivan

Amy Laburda
All right. So we've talked about stocks and bonds. If someone's very risk-averse, might they just lean toward cash?

Ben Sullivan
They might lean toward cash. That's kind of what the typical risk-averse investor

will go into.

Amy Laburda
The safest investment of all, right?

Ben Sullivan
Over the long term, no.

Amy Laburda
In my own defense, I was mainly just teeing you up. I've worked with you too long to [not] know what you were going to say there. But for the benefit of our listeners who haven't worked with you for many years, why is cash not as safe as it looks over the long term?

Ben Sullivan
So it's because of inflation, which is kind of front of mind for a lot of people lately. So as inflation increases, your money's purchasing power erodes. So if you had $10,000 that you didn’t

need immediately back in 2015, and you just held it in a bank account. It's worth less now than it was worth at that point. If instead you invested that money and you're able to exceed the rate of inflation, then your money would be worth more now. So really, like if we go back to that risk versus return, the paramount risk that everyone thinks about is volatility in the short term. And that's the risk that stock markets provide. And so you don't know what's going to happen in the short term. In the long term,

they have a higher expected rate of return. And then in the short term, cash, fixed income, bonds, all of those are a lot more predictable. There's not as much quote-unquote risk volatility moving up and down over the short term. But over the long term, they have a lower expected rate of return. So if you're not keeping up with inflation, that provides a greater level of risk, actually.

Amy Laburda
Makes a lot of sense.

So I'm sure some of your clients are more on the risk-averse side, just because of the way populations go. What kind of other safeguards, if any, do you talk about with them when they're constructing their portfolio or they're approaching investing?

Ben Sullivan
Right. So really, we have the framework of stocks versus bonds, but we're just talking about, like, stocks and bonds there. Really, when we try to invest, we're not picking individual stocks. We're not picking individual bonds. That's taking on risk that clients don’t need to take on,

and what is not compensated for in markets. So just because you take on a risk doesn't mean that you're going to get a higher rate of return. So if the CEO of a company gets involved in a scandal, if there's accounting fraud at a company, if a company is producing an item that's subject to a recall — there's any number of things that can go wrong with one company's stock, and you don't want to take on that risk.

So we diversify away from that risk by investing in mutual funds and exchange-traded funds. So those are two pooled investment vehicles that allow you to diversify, get a broad basket of securities. So it still gives you the overall market risk exposure to a specific asset class, but not the individual company risks.

Amy Laburda
So you're not out there

crying into your cornflakes if you invested in Theranos, ideally.

Ben Sullivan
Exactly. So it sounds exciting. There is the opportunity for outsized returns by individual stock investing, and everyone's lured by that potential, but it's not a compensated risk, so it's just not logical to take on that kind of exposure.

Amy Laburda
OK. So to sum up, you're thinking about asset classes, which is stocks versus bonds, even if you're using mutual funds or ETFs

to get exposure to them. And then you're making sure you're diversified properly, so you're not putting all your eggs in one basket. So when you sort of boil them down to those basics, it doesn't sound wildly difficult to understand.

Ben Sullivan
No, I think there's this whole universe where there's, like, an infinite amount that you can learn about investing. You can make it as complicated as you want, or as simple as you want. And so long as you have the basic principles of investing down, it's not really that complicated. You just get into the nuance over

time. But acting on that, it's kind of like acting on a healthy diet or a healthy lifestyle. It's so much easier to do in theory than it is in reality. So even when you know the proper way to invest a portfolio, trying to implement that is harder than it sounds.

Amy Laburda
Sure. So now we're sort of getting back toward that investment psychology piece I brought up at the beginning of our conversation. But it sounds like, you know,

we're talking about roller coasters, which is a thing that triggers your adrenaline, that can trigger high emotions. How is that a challenge when you're working with clients and getting people good investment advice?

Ben Sullivan
Right. So people bring a ton of emotions and preconceptions to the table when they're making investment decisions, but you don't want those to cloud your judgment. You don't want to be making investments based on emotion. You want to have a preset plan in advance and kind of predict how you're going to react,

so that you're not making decisions in the heat of the moment.

Amy Laburda
Sounds sensible, but also sounds easier said than done.

Ben Sullivan
Right. Yeah, I manage my clients’ money better than I manage my own. And when I help my family manage their money, I don't do it as well as when I manage my clients’ money. A lot of people always say, “No one's going to care more about your money than you, yourself.” And that is true,

but it's also kind of a bug in the system. You don't want to be caring so much about the money. You have to be a little bit unemotional about it, so that … When I'm working with clients, I need to follow the investment strategy that we set out in advance in writing. I can't just let my feelings about the market dictate what I do. There's a process in place for a reason. And through 16 years, I've seen it work better than what I do for myself. So I've often thought I need Anthony, Paul,

ReKeithen, Eric, any of them [my colleagues] to manage my portfolio, because they would just make me do what we do for our clients, as opposed to me looking out, hearing a news story in the morning and saying, “Oh, there might be a government shutdown. Ooh, we might go to war. I don't know if it's a good time to be investing right now. Let me hold some cash on the sidelines.” And over time, like we said, the stock market has positive rates of return. You want to get exposure to the stock market,

and you want to have that long-term mentality. And it's easy for me to do that as an investment adviser for my clients’ money, but not so easy for my own.

Amy Laburda
To go back to your health analogy, it's sort of like… We don't usually have doctors treat their own family members, and there's a reason for that.

Ben Sullivan

Amy Laburda
So we've talked a lot about risk aversion, about the way that the news can make you nervous, or the way that stock market returns can sort of make a drop in your stomach, but,

what about the opposite end of the scale? People who like the risk, who kind of like the rush? Are there emotional dangers on that side too?

Ben Sullivan
Absolutely. I think it comes from a mental trap that's easy to fall into. People think something that they read or heard gives them an edge on finding a hot stock, or jumping into the market or out of the market as a whole. And a stock's price represents the market's collective wisdom of what it's worth. And there's quite possibly a major development that will

come up that you've ignored or underestimated in your analysis. But it's so tempting to say, “Hey, I heard this story. The market doesn't realize that this drug is going to go to market and this pharmaceutical stock is going to really fly high. And man, I’ve got to put $25,000 into that stock.” And it's like, yeah, the market knows more than any one investor does. It's the collective wisdom.

And to think that you as an individual investor, whose sole job is not looking at individual stocks and determining whether they're valued appropriately or not, is going to be able to outperform all these professionals and the entire market as a whole… it takes a little bit of hubris. And it doesn't, it's not the kind of hubris where you think you're better than everyone else. You just don't realize that you're competing against the entire world when you're trying to make an

investment decision on these individual changes that you're trying to predict in the short term.

Amy Laburda
Right. And technology plays a factor too, right? As an individual person who is reading a New York Times alert on your phone, there's a speed differential as well.

Ben Sullivan
Right. So people get worried about high-speed trading sometimes, high-frequency trading. And investors, long-term investors, aren't trying to compete against these people and these algorithms. If you're trying to compete against them, the human is

not going to be able to succeed. We're not going to win. So we're playing a different game than the high-frequency traders. We're investing for the long term based on trends of what's happening in the markets, and then based on needs for your individual portfolio.

Amy Laburda
So there was some talk about stock trading going up in 2020, when everyone was stuck at home during the lockdown. Would you say that that was probably a symptom of more boredom than everyone suddenly becoming very

acute traders?

Ben Sullivan
Yeah, I would say that. I think COVID is a great example of people trying to predict the market. So let's just say you were really tuned in, and it was January 2020, and COVID was hitting China, and you thought it might spread to other areas. So if you acted on that and you decide, “Hey, I'm going to liquidate all my investments because there's this massive global pandemic that's coming

and it's going to cause everyone to be stuck in their home. They're not going to be able to buy anything.” And you got out of the stock market. That's fantastic. You saved the drop that was there. So you got out of the market in January 2020. March 2020 rolls around, and you are stuck at home. You're not going out and buying things. And you're like, “Man, the world is about to end.” Like, literally, the world might end for you. And it's hyperbole, but it's true for some people. And

at that moment, you're still extremely risk-averse, and you got the first decision right. But then the market skyrockets, and it bounces right back. There's a ton of fiscal stimulus. There's a ton of support programs helping companies out there, and the stock market roars back. So you got the right decision in the beginning, but now you didn't make the second decision to get back in. So that's the problem with trying to game the stock market, is you

have to make two decisions right. You have to get out at the right time and you have to get back in at the right time. And tying it back to investment psychology, it's just extremely hard to do that right one time. And to do that properly throughout your entire investing career is impossible. There's just so many emotions that come into play there. So instead of trying to predict the short-term fluctuations of the market, really just

refocus on the primary belief that you have in markets, that markets go up over the long term, that what you need for the short term needs to be protected in secure investments.

Amy Laburda
We're sort of working uphill against our emotions. What other kinds of tricks can our minds play on us when we're trying to make good investment decisions?

Ben Sullivan
So one trick that a lot of people fall victim to is the concept of anchoring.

So that's when the past value of something kind of sticks in your mind, even if that value has changed. So if you're thinking about a stock that was trading at $30 a share two months ago, and now it's trading at $60 a share, you might be tempted to think that it's overvalued, and you don't want to buy it anymore because it's doubled in value. But if the potential for that stock, or that investment, to continue to go up over the long term is still there,

it might be a good value at $60. You're not going to get the same rates of return as the people who invested at $30, but it doesn't mean that it's the wrong investment. So you shouldn't anchor to an original price. Really, a lot of times, this gets into anchoring with larger dollar items, so the value of a house. If you saw your house was worth a million dollars six months ago, nine months ago, and then you have to sell it, you're probably going to want close to a million dollars.

But interest rates have increased, and the housing market has kind of declined a little bit. So if the house is worth $800,000, it's not rational to try to sell for a million dollars at that point, no matter how much you want to sell for a million dollars.

Amy Laburda
On the same note of getting attached to an asset or a price, you wrote about the endowment effect in the chapter. Can you talk a little bit about what that is?

Ben Sullivan
Right. So that's when you tend to value something that you currently own more

than things that you don't own. So it's, again, going to the house. My house is always worth more than someone else's house. I love it. I painted it the color that I wanted. I furnished it the way I wanted. I laid it out the way I want it. It's mine. People should value what I own. And I really just, I feel like it's valuable because I have this intrinsic worth with it. So it can be harder to divorce emotion

with something that you currently own already.

Amy Laburda
So since emotions are definitely not the best way to tell this, how do you tell when it is time to sell a stock or another investment that you own?

Ben Sullivan
So that goes back to kind of what we were talking about before, having a framework for investing. So I don't like making individual decisions. I like having a framework for how I make my decisions. So really, when we're talking about managing a portfolio, we're talking about setting a long-term asset allocation

that's investing in broad pools of different types of investments. So not individual stocks, but different types of investments overall. And then from there, I want to be able to manage that portfolio kind of based on those rules. So when we're thinking about it, we set that allocation. So let's just say you have 60% in stocks and 40% in bonds. If the stock market has been performing really well over time, your portfolio might go to

65% in stocks and 35% in bonds. So I don't want to make an emotional decision to say, “Hey, the market's really hot right now. I want to keep investing,” or “The market's really hot. It's due to have a reversal.” What I'm just doing is I'm saying that the portfolio overall is out of balance. So I'm taking on more risk by having more money in stocks at that point than in bonds. And based on my goals, I need to have 40% in bonds. So I want to

bring my portfolio back to that target. So I'm not making an individual investment decision to sell investments right now. I'm just proceeding with the plan on how to manage my portfolio. So there are times when you have to make an individual investment decision. Is it time to sell now or not? And really what you want to do is you want to look as unemotionally as possible at the facts as they exist in that moment. And it's one of those concepts that people talk about.

Like if you're holding a stock right now, you want to only be holding that stock if you were willing to buy it again right now. So every day you're not selling, you're essentially buying that stock. So I think that really taking a look at the situation and making a decision logically at that point is what I would recommend.

Amy Laburda
So for a lot of listeners, it might feel instinctually wrong to sell what does well and

buy what does badly. What's the benefit of that approach?

Ben Sullivan
So the benefit of that approach is based on what a lot of academics and industry professionals talk about: mean reversion. So when you're thinking about the different types of investments, they have different risk and return profiles. So as we said before, stocks have a higher expected rate of return. So let's just call that a 9% expected rate of return for stocks. So if stocks recently have performed

14%, 15%, 25% over the short term. A lot of time, you don't know when it's going to happen, but they're going to revert back to that mean return of 9%. So they might go to 9%, they might go to negative 10%. So you don't know exactly what's going to happen, but as I was saying, you're getting over-concentrated in a given area that has outperformed. There's probably a little bit more risk there, and you want to just go back to

what you were originally targeting.

Amy Laburda
So you've made this framework for decision-making. Presumably you don't want to change it lightly, but do you ever need to revisit your plan and sort of change the rules of the framework you're using, or your asset allocation, to use the more specific term?

Ben Sullivan
Right. So I think it comes back to evaluating your individual situation, your individual needs. So one: Have you gone through an experience where you lived through it and you

had trouble sleeping? You lived through it and it was painful. That is a sign that you've taken on too much risk in your portfolio. There's also always, like in the market, there's always new information coming in. There's always new information coming in for your personal life as well. So if something in your personal life has changed so materially compared to what you're expecting, that's an appropriate time to reevaluate your overall investment strategy. If you're going to need money substantially sooner

than you originally thought you were going to need that money, then you want to change your asset allocation at that point.

Amy Laburda
And I imagine having an investment adviser separate from you to check in with is also a helpful point of reference to say, “Is this actually a big change, or am I just feeling antsy in the moment?”

Ben Sullivan
Yeah, no. It's funny because everyone always thinks that, “OK, I'm about to retire. That is a major change in my life. I have to majorly adjust my portfolio.”

And if you've been paying attention the entire time that you've been investing, that retirement most often is not a sudden occurrence that was unexpected. So it's usually something that you're leading up to and is predictable. So I think that that's kind of an investment bias that people get into too, is just kind of thinking in absolutes. So at one point you're employed, at one point you're not employed, and you might think that you have to go from a really aggressive portfolio

to a really conservative portfolio. But again, going back to that time frame, the time frame for your money in retirement is not one year. It's probably over a 30-year retirement. And depending on your resources, a lot of people, even retirees, have long time horizons beyond their life expectancy.

Amy Laburda 28:58
So it sounds like, understandably, people get hung up on absolutes. But people also get hung up on the thing that just happened to them. It's top of mind. Is that a thing you see with your investors sometimes?

Ben Sullivan
Right. That's kind of what we want to characterize as “recency bias.” So humans have this tendency to assume that conditions that were created by a recent event will persist far into the future. So for example, in the years following the 2008-2009 financial crisis,

a lot of investors tried to protect themselves against another market freefall, as opposed to focusing on profiting off of the recovery. So performance in the recent past is possibly the least helpful metric for assessing investment, but it's the easiest data to get and can be the most memorable. So that's also the availability bias right there. Really, when I'm thinking about the markets right now, when you talk about recency and

these biases, a lot of times you're more short-term focused than you realize, because you're experiencing the recency bias. So I think right now in the markets, interest rates are pretty high. They're 5% right now. We feel like, “Oh man, we've been through a period where interest rates have been zero for most of my career, 15 years.” You think that 5% is incredibly high interest rates. But when you take a step further back,

you think about our parents and in the 1970s, the interest rates they were paying on mortgages were in the teens. So you try to think about things in a longer term and you're like, “Well, like, it's been zero for a while, five sounds high,” but there's nothing that's going to prevent interest rates from potentially going higher from here. It's just we're kind of anchored to that 0% interest rate. So five feels high. But if interest rates were five for an extended period of time, they

wouldn't necessarily feel high. It's kind of a more normal interest rate environment. So you don't want to be too focused on that short-term perspective and kind of take a broader view to the long-term history. That's why when we're thinking about the different risk and return profiles, we go back to 1926 for looking at the returns of markets. So that gets into all of the recency, the availability bias. We're all

subject to these things. And it's not because we're naive. It's not because we're not educated. It's just human nature.

Amy Laburda
Yeah. Something can feel right without actually being right. And it's easy to fall into the trap of, “But that feels correct.”

Ben Sullivan
Yeah. And like, okay, let's go into herd behavior with that too. Everyone is behaving in the same way. Everyone is having these same biases. Everyone has had that same recency. So when you're seeing other people say, “Hey, I can get 5% on my money market fund.

Why don't I just put all of my money in a money market fund instead of investing in longer-term bonds?” And it's like, well, go back to 2007 and pre-financial crisis, interest rates were around 5%. I was getting that on my bank account, my high-yield savings, and I felt good. But that only lasted for a short period of time. And if I had been invested in longer-term bonds, one, when interest rates go down, the value of existing bonds go up.

And two, it locks in the interest rate for a longer period of time. So if right now I buy a three-year bond, I might get less in the short term, because three-year bonds have lower yields than cash right now. But I've locked that in for a longer term. So you don't want to get sucked into that recency bias of, “Hey, 5% is a high interest rate.” You want to look into the long term and see, “Hey, last time interest rates were going to drop,

it was a great time to lock in the longer-term interest.”

Amy Laburda
Yeah. And with herd mentality, you also get into bubbles, right? I don't want to narrowcast too specifically to millennials here, but I feel like those of us who lived through the Beanie Baby craze always have a very demonstrable example to go to of “Everyone has been buying these, obviously they will be worth a lot of money one day.” And I can't say I've checked recently on Etsy, but you've seen the craze pop in the way that bubbles tend to.

Ben Sullivan 33:21
Right. So whether it's Beanie Babies, or cryptocurrency, or meme stocks, all of these things — you get the FOMO of, “Hey, these other people are doing things that are so easy. They're making a bunch of money. It's fun. Why don't I just do that?” And when you get this feedback loop, it works for a while. And I think that's really something important to think about too, is like, there's this feedback that tells you

that these other people are doing something that's right, that you should change your strategy. And it's hard to resist sometimes, but really you just have to go back to “What are the long-term fundamentals of an investment? What is my plan? How does this play into my plan?” And think about that risk and return. And if it's too good to be true, it often is.

Amy Laburda
I think that leads nicely into my next question, which is:

We've talked a lot about the way our own brains can lead us astray when we're investing. But what about external manipulation, manipulation from other people? Is that also a pitfall people have to look out for?

Ben Sullivan
Yeah, I think that that might be an understatement that you have to be looking out for that. So as you know, as everyone knows, Palisades Hudson is a fiduciary for our clients. I think we take that responsibility very seriously. We have a legal obligation, and also we really just embody

that responsibility to put our clients’ interests ahead of our own. So anytime I'm thinking about my clients’ money, I'm always thinking “what is in their best interest?” But not everyone's a fiduciary. So there are people out there that are trying to take advantage of all of these behavioral biases, psychological biases that people experience. So they might appeal to your recency bias by trying to get you to buy something that will protect against yesterday's problem.

They might try to promise you something that … It's designed to sound amazing. “So let me give you the stock market return without the downside volatility.” Like, who doesn't want that? That is fantastic. That's exactly what I want. Like, if you could give me a guaranteed income, that's what I want to buy. So it's like highly logical, highly appealing. But clients will bring these ideas to us because they've attended a steak dinner where someone is pitching this.

And it's like, “Man, that sounds pretty good. I'll take a look at it.” So you wind up digging into these things, and you always find in the details that there's some kind of caveat. They're not giving you the dividend return. They're not giving you the full upside, if there's a drop at some points. There's always some kind of caveat in here where it's like a gotcha. So you’ve got to be careful when you're thinking about these. You want to establish a relationship with someone that you can trust.

Or really, do your own due diligence over the long term, not trying to make these individual investment decisions in the heat of the moment after you've gotten a really nice dinner. So I think, yeah, you just have to be wary. You have to think deeply about things. You want to be in a good mental state when you're making these investment decisions and prioritize proceeding according to a given plan, not just acting on whim when someone brings something new to your attention.

Amy Laburda 36:41
All right, Ben, well, we've covered a lot of ground on investing and investment biases. Is there anything else that you want our listeners to know that we haven't covered so far?

Ben Sullivan
Yeah, I'd say… We live in a really unpredictable world. There's a lot of variables that are outside of our control. And when you're thinking about investing, you want to be able to control as much as you can control. You don't want to be taking on risks that you don't need to take on.

So you want to diversify away from individual investments. You don't want to be worried about what the CEO of a company is going to do, what a recall is going to do. You don't need to worry about any of those things. There's no compensation for worrying about those things. So you want to diversify away from individual investments. You don't want to make any big decisions suddenly. You want to act in small steps for the most part, mostly planned, kind of going back

to your overall philosophy and depending on that to help you make your decisions, when you do need to make individual decisions. You always want to be focused on the long term. And like I was saying, you want to reduce the amount of decisions you need to make by having that framework in place. You want to make managing your portfolio more like you'd pursue a professional assignment. When you make something a job, people need to take it seriously.

And they don't just act impulsively. They have a pre-planned system that helps them make better decisions. And whether you have someone helping you do that or you do that on your own, it's going to lead to better outcomes than just trying to go at it as things approach you.

Amy Laburda
All right. I think making a good plan and sticking to that plan seems like a pretty sensible approach to me. So thank you so much for coming on today, Ben. It was great to talk to you.

Ben Sullivan
You as well, Amy. Thank you for having me.

Amy Laburda 38:33
“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta; Austin; the Portland, Oregon metropolitan area; and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor and mixer. Our firm has written two books:

Looking Ahead: Life, Family, Wealth and Business After 55, and The High Achiever’s Guide to Wealth, which offers advice for younger professionals, entrepreneurs, athletes and performers. Both books are available on Amazon, in paperback and as e-books.