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ING Behavioral Finance: The Power of Not Losing Presenter Name - Title 2012 CID: 2775.

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Presentation on theme: "ING Behavioral Finance: The Power of Not Losing Presenter Name - Title 2012 CID: 2775."— Presentation transcript:

1 ING Behavioral Finance: The Power of Not Losing Presenter Name - Title 2012 CID: 2775

2 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 2 Behavioral Finance and Managing Our Biases Bank of America Corporation (“Bank of America”) is a financial holding company that, through its subsidiaries and affiliated companies, provides banking and investment products and other financial services. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly-owned subsidiary of Bank of America Corporation, and a registered broker-dealer and member of FINRA and SIPC. Investment products provided by Merrill Lynch, Pierce, Fenner & Smith, Incorporated: The views and opinions expressed in this presentation are not necessarily those of Bank of America Corporation; Merrill Lynch, Pierce, Fenner & Smith Incorporated; or any affiliates. Nothing discussed or suggested in these materials should be construed as permission to supersede or circumvent any Bank of America, Merrill Lynch, Pierce, Fenner & Smith Incorporated policies, procedures, rules, and guidelines. Merrill Lynch, Pierce, Fenner & Smith Incorporated are not tax or legal advisors. Clients should consult a personal tax or legal advisor prior to making any tax or legal related investment decisions. Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value

3 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 3 Behavioral Finance and Managing Our Biases Does the Market Have You Feeling Like This? Content of this presentation has been approved by the ING Investment Management (Americas) Compliance Department. Certain copywrited and trademarked information illustrated or presented in this material are the property of their respective firms. This material is for illustrative purposes only.

4 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 4 Behavioral Finance and Managing Our Biases Winning by not Losing Today’s Agenda: Investor Results in the Market The Emotions of Investing The Bedrock of Behavioral Finance – Loss Aversion Rate at which to buy and sell It’s Important to Reduce the Chance of Losing Content of this presentation has been approved by the ING Investment Management (Americas) Compliance Department. Certain copywrited and trademarked information illustrated or presented in this material are the property of their respective firms. This material is for illustrative purposes only.

5 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 5 Behavioral Finance and Managing Our Biases Investor Results in the Market

6 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 6 Behavioral Finance and Managing Our Biases Investors Aren’t Keeping Up Data source: Dalbar, Inc. (as of 12/31/10) Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Investors cannot invest directly in an index.

7 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 7 Behavioral Finance and Managing Our Biases Stop Or Your Portfolio Gets It! “For investors as a whole, returns decrease as motion increases” – Warren Buffet

8 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 8 Behavioral Finance and Managing Our Biases Long-Term Goals Giving Way to Short-Term Actions Data source: Dalbar, Inc. (as of 12/31/10)

9 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 9 Behavioral Finance and Managing Our Biases Buy High, Sell Low? Investors tend to... Past performance is no guarantee of future results. Russell 1000 Growth Index measures the large-cap growth segment of the U.S. equity market including Russell 1000 companies with higher price-to-book ratios and forecasted growth. Investors cannot invest directly in an index. Source: Strategic Insight; utilizes Morningstar Large Cap Growth category as definition buy at market highs sell at market lows

10 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 10 Behavioral Finance and Managing Our Biases The Emotions of Investing

11 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 11 Behavioral Finance and Managing Our Biases Investor Returns or Investment Returns? Yahoo!® Finance – 6 Numbers Every Investor Should Follow “Investor Returns Morningstar® calculates "investor returns," which measure the average investor's returns in a particular fund, versus its published returns. These returns reveal how much money investors actually make or lose in a fund based on when they buy and sell. More volatile funds generally have lower investor returns because investors make emotional decisions to buy or sell at the wrong times.” Source: Yahoo! Finance. 6 Numbers Every Investor Should Follow. 5/10/11

12 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 12 Behavioral Finance and Managing Our Biases The Power of Not Losing Where is an Investor’s Trigger Point? Investment LossGain Needed to Recover ?-10%+11% ?-20%+25% ?-30%+43% ?-40%+67% ?-50%+100% “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffet Past performance is no guarantee of future results. This example is for illustrative purposes only.

13 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 13 Behavioral Finance and Managing Our Biases Our Biases – Emotional Reaction, Physical Impact Losses have DOUBLE the psychological effect of gains

14 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 14 Behavioral Finance and Managing Our Biases Our Biases – Emotional Reaction, Physical Impact How Quickly Do You Return to Normal After Winning $1,000? How Long Does it Take to Get Over Losing the Family Pet?

15 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 15 Behavioral Finance and Managing Our Biases Loss Aversion

16 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 16 Behavioral Finance and Managing Our Biases Bias: Loss Aversion Loss Aversion - refers to people's tendency to strongly prefer avoiding losses to acquiring gains, typically caused by recent losses. Behavioral Observations  Removing all money from the market, going to 100% cash  Dramatically overweighting fixed income investments  Quick to sell investments with short-term underperformance  Losing focus on longer-term goals and concentrating on daily market volatility Key Concepts  Investors tend to be their own worst enemy, buying and selling at the wrong times  This behavior is the main cause of poor investor outcomes  Every investor has a Trigger Point that creates this reaction and it’s different for everyone  The most important part of achieving long-term goals is to build a plan designed to help eliminate or diminish these behaviors

17 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 17 Behavioral Finance and Managing Our Biases Is the Image Moving? This example is for illustrative purposes only.

18 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 18 Behavioral Finance and Managing Our Biases Which Fund Would You Rather Own? 10 Year Average Annual Returns of Two Large Cap Value Equity Funds As of 9/30/11 Past performance is no guarantee of future results. Hypothetical example, this is for illustrative purposes only.

19 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 19 Behavioral Finance and Managing Our Biases Which Fund Would You Rather Own Now? Fund B experiences a 39% loss during that same time period Fund A loses over 55% during the 2008 downturn… 10 Year Rolling Returns of Two Large Cap Value Equity Funds Past performance is no guarantee of future results. Hypothetical example, this is for illustrative purposes only. Investors Typically Buy At The Peak Investors Typically Sell At The Bottom

20 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 20 Behavioral Finance and Managing Our Biases We All Have Our Trigger Point

21 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 21 Behavioral Finance and Managing Our Biases Understanding and Planning Around the Trigger Point Ask a Few Questions To Help Clients Think Through Their Decision Do you believe that an investment under consideration produces a return with little risk? Do you understand the risks? Are you looking to this investment to help you reach your long-term—10 years— investment goals? Do you expect the value to decline the day after you make an investment? If the value does decline immediately, will you withdraw your funds? What if the value declines over the next 12-24 months? Identify The Trigger Point, Build A Portfolio Aimed at Avoiding It Understand this behavior is deeply rooted in us and nearly impossible to stop Establish the Trigger Point – What will cause loss aversion behavior to kick in? Build a portfolio to help avoid the Trigger Point

22 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 22 Behavioral Finance and Managing Our Biases Planning Ahead to Manage the Trigger Point If the Trigger Point is Hit, Ask a Few Questions Before Acting Other than the price, what else has changed? What other information do I need to determine if this is truly bad news? Are my original reasons to invest still valid? If I liked this investment enough to buy at a higher price, shouldn’t I like it even more at a lower price? Has this investment ever gone down this much before, and if so would I have done better selling out or increasing my position?

23 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 23 Behavioral Finance and Managing Our Biases Everyone’s Relationship to Money is Unique Each of us views the value of money differently Which means we each will view loss and risk differently All of us will have a Trigger Point…but the actual number will be unique to us Content of this presentation has beem approved by the ING Investment Management (Americas) Compliance Department. Certain copywrited and trademarked information illustrated or presented in this material are the property of their respective firms. This material is for illustrative purposes only. My View of Money Your View of Money

24 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 24 Behavioral Finance and Managing Our Biases The Lesson of Behavioral Finance – Managing Loss High negative returns have the potential to put portfolios in a deep hole and trigger our emotional biases Biases are typically deeply engrained in us and can cause us to make poor decisions Understand your biases Don’t fight them, use them to plan in a way that gives you a higher probability of not veering from your established goals

25 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 25 Behavioral Finance and Managing Our Biases This information is proprietary and cannot be reproduced or distributed. Certain information may be received from sources ING Investment Management (“ING IM”) considers reliable; ING IM does not represent that such information is accurate or complete. Certain statements contained herein may constitute "projections," "forecasts" and other "forward-looking statements" which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial data. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING IM's core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates (viii) general competitive factors, (ix) changes in laws and regulations, (x) changes in the policies of governments and/or regulatory authorities, (xi) conclusions with regard to purchase accounting assumptions and methodologies, (xii) ING IM's ability to achieve projected operational synergies. Any opinions, projections, forecasts and forward looking statements presented herein are valid only as of the date of this document and are subject to change. Nothing contained herein should be construed as (i) an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. ING IM assumes no obligation to update any forward-looking information.

26 Do not put content on the brand signature area 26 Behavioral Finance and Managing Our Biases Appendix

27 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 27 Behavioral Finance and Managing Our Biases Understanding Our Decision Making Which return is more attractive to you? +5%or+6% +10%or+15% +15%or+22% -5%or-6% -10%or-15% -15%or-22%

28 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 28 Behavioral Finance and Managing Our Biases Evaluating Portfolios - Definitions Standard Deviation The variance or dispersion of a portfolio’s returns around its average returns over a period of time. This is a good tool, but it’s important to remember that it’s relative to Fund’s own average. Beta The portfolio's volatility in comparison to the market or benchmark. This helps investors identify a fund’s risk relative to benchmarks either low (beta 1). It’s important to review the Fund’s benchmark performance when considering beta. Alpha The difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. This helps investors identify the value a manager is adding relative to a benchmark. Sharpe Ratio The reward per unit of risk, with the higher the ratio the better the historical risk-adjusted performance. This helps investors measure risk-adjusted performance. This is not relative to a benchmark and enables comparison of portfolios with different risk levels Downside Capture Ratio A portfolio’s overall performance relative to an index in down markets. This helps investors evaluate how well ( 100) a manager performed relative to an index’s down periods. Information Ratio A special version of the Sharpe Ratio that uses a portfolio’s benchmark in evaluating risk. This helps investors measure both excess return against a benchmark and the consistency of those returns. In other words, did a manager obtain strong returns by beating the benchmark a lot in a few months or consistently by a little each month.

29 Do not put content on the brand signature area Orange RGB= 255,102,000 Light blue RGB= 180,195,225 Dark blue RGB= 000,000,102 Grey RGB= 150,150,150 ING colour balance Guideline www.ing-presentations.intranet 29 Behavioral Finance and Managing Our Biases Bias: Loss Aversion Loss Aversion - loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains Key Concepts  Investors tend to be their own worst enemy, buying and selling at the wrong times  This behavior is the main cause of poor investor outcomes  Every investor has a Trigger Point that creates this reaction and it’s different for everyone  The most important part of achieving long-term goals is to build a plan designed to help eliminate or diminish these behaviors  Your Financial Advisor can help you build a portfolio designed to help reduce the chances of experiencing Loss Aversion


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