FINANCIAL DECISION MAKING – WEEK 4 – ANSWER 1
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ANSWER TO PIER
Respond to your classmate’s post, and explain whether you agree or disagree with each of your classmates. Use your Learning Materials to support your response.
POST FROM STUDENT:
Money is a sensitive subject for most, overconfidence in oneâ€
s abilities can come from ego or lack of trust. Many people choose to handle their finances personally as opposed to seeking a professional for help because they do not trust someone else with the money they earned, showing the emotion tie to their income. While this maybe irrational as there is an experience and educational advantage money managers have over the average investor, they are not full proof.
Trust issues, overconfidence, loss aversion, and many other biases have been studied in this class and to assume that they are strictly limited to retail investors would be a mistake. Money Managers are susceptible to all biases faced by individual investors but there is the hope that they are disciplined enough to acknowledge their weakness and have codified/viable trading strategies that curves their individual bias. But while being professionals they are still people and subject to pride and overconfidence, “some of the bullish bias to analysts’ tunnel vision related to the specific stocks.†(Duggan, 2017) Bias is universal, if money mangers were unbiased how would they form strategies. By having a strategy, you are targeting a subset of assets and if that strategy works the manager is likely to use it again and develop a bias.
The advantages of having a professional manage your finances are reduction in stress levels, diversification, and potentially higher returns. Lack of diversification exposes investors to idiosyncratic risk, retail investors tend to have “A typical portfolio: 4 stocks, $35,000 in value.†(Slide 17) With 4 financial assets and all of them being stocks the individual is not well diversified. A good money manger would expand their allocations to multiple resources and potentially different assets depending on the clientâ€s goals/needs. Another factor is the cost of a Financial Advisor “if you work with an investment adviser who uses active equity mutual funds, you are paying about 1.6% per year and about 1.09% if the adviser uses index funds.†(Roche, 2018) While these percentages may seem light, they accumulate overtime and as your investment grows. This percentage could also be the driving factor for a money manager to perform well as they do not want to lose that income for poor performance.
Personally, I manage my own trading account and ROTH IRA but have my 401k managed by Morning Star. I choose to manage my Roth IRA on my own until I surpass the threshold set by my bank to where an advisor becomes available at a discount. I use Morning Star for my 401k because it relieves stress, frees up time as there is less for me to research, and it is a form of collaboration reducing my own bias on my total portfolio. I have a smaller trading account that I manage my stuff where I test what I have learned in class. I believe my split reduces my own bias as I have another party handling a portion of my portfolio therefore, I am limited to alter only a subset of my total portfolio thus minimizing my behavioral bias. In addition, I would have to make sure to choose a money manager that is different from myself, i.e. not sharing any biases.
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FINANCIAL DECISION MAKING – WEEK 4 – ANSWER 1 was first posted on May 28, 2020 at 2:50 am.
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FINANCIAL DECISION MAKING – WEEK 4 – ANSWER 1 was first posted on May 28, 2020 at 2:52 am.
©2020 "homeworkcrew". Use of this feed is for personal non-commercial use only. If you are not reading this article in your feed reader, then the site is guilty of copyright infringement. Please contact me at homeworkcrew.com@gmail.com
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