It is important because we’re all human. For decades data-driven concepts like modern portfolio theory and efficient market hypotheses guided advisors’ work with clients.
These ideas remain essential, but it’s clear that we all have become more data-dependent, and we all react differently to changes in financial or economic conditions. This is where behavioral finance comes in.
Behavioral finance helps to explain the ways that emotional cognitive biases can directly influence investment decisions.
For example, during a long bull market, recency bias may cause investors to expect the upward trajectory to continue. On the other hand, during periods of market volatility, loss aversion can potentially lead to panic selling, locking losses that otherwise could have been avoided.
At Schwab Asset Management, we work with advisors and their clients to help investors achieve their goals by trying to bridge the gap between what the client wants and what the client needs. We do this by providing insights, practical tools, and investment solutions that incorporate behavioral finance, that also reflect our distinctive company values that are founded by our investment philosophy, research, expertise, and experience.
Information provided herein is for general information purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Schwab Asset Management® is the dba name for Charles Schwab Investment Management, Inc. Schwab Asset Management is a subsidiary of The Charles Schwab corporation.
