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Short-Term Thinking Equals Poor Investing Decisions

We recently (in fact, make that always!) talked about the importance of keeping emotions out of investing. We had a key example…

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: September 26, 2012

We recently (in fact, make that always!) talked about the importance of keeping emotions out of investing. We had a key example of behavioral bias this month, with a customer who made a large withdrawal from his account.

After noticing this movement, Jon sent the client a note, which he tends to do when he notices any unusual activity. Our clients are 100% in control of their money, but we find it helps to check in when they make big decisions – whether it’s a withdrawal, large deposit or allocation change.

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The guy explained that he was disappointed with Betterment’s return and felt he could get a better result with fidelity mutual funds (FBIOX, PSTDX).

We always encourage clients to do what they think is best – but there are several reasons Jon felt this was a rash decision.

As investors, we should be looking for long-term returns. It’s the only way to build up meaningful wealth. By only focusing on short-term results, we miss an important part of the picture. Over the seven months this client had been with Betterment, these funds did not provide a good basis for comparison:

  • PSTDX is supposed to compare well to the S&P500 (which is it’s stated goal), but it has not come close since 2008, likely due to poor active management. In fact, Betterment would have significantly outperformed this fund.
  • FBIOX is a biotech fund – quite risky compared to the Betterment portfolio. Fine to have as part of your holdings, but we would encourage diversification (look at what happened to tech funds in 2000, when they collapsed relative to the broad market).
  • Returns expectations operate over a long time frame (at least 10 years) and any particular year could be above or below that mean. This client had not even been with Betterment for a year, which is not enough time to see meaningful results.

September has been an interesting month as we experienced gains in the market (hooray!).

We noticed over here at Betterment, however, that withdrawals were up in general. There is logic to this. When we experience poor returns, we worry that we’ve made a bad choice, so are happy to withdraw our money once we break even. It’s a classic bias against taking losses – but ultimately, this approach will not serve you in the long-term.

On that note, Betterment released a returns widget last week based on the real Betterment portfolio. It helps you understand how your account would have performed based on past decisions. It’s pretty neat!

Take a look for yourself.

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