Читать книгу Behavioral Portfolio Management - C. Thomas Howard - Страница 28

Behavioral Portfolio Management focuses on the behavioral aspects of financial markets to help make better investment decisions. BPM’s first basic principle is that Emotional Crowds dominate the determination of both stock prices and volatility, with fundamentals playing a small role. This means that more often than not prices reflect emotions rather than underlying value, a consequence of arbitrage failing to keep prices in line with fundamentals. As a result, price distortions are the rule rather than the exception, making it possible for BDIs to build superior portfolios, which is the second basic principle.

Volatility and risk are not synonymous. In the case of meeting short-term financial goals, volatility is an important contributor to investment risk, as measured by the chance of underperformance, and this is the third basic principle. On the other hand, volatility plays a much less important role when building long-horizon portfolios. By focusing on short-term volatility when building long-horizon portfolios, the investor injects emotions into the portfolio construction process. It is important to distinguish between emotions and investment risk so that the best decisions can be made.

The bottom line is that building successful investment portfolios is straightforward but emotionally difficult. Making decisions based on price distortions created by the Emotional Crowd and ignoring short-term volatility when building long-horizon portfolios presents significant challenges for investment professionals. This is because such a strategy is frequently going against the Crowd, thus depriving the client of social validation, and in turn asking them to set aside the strong emotions associated with volatile prices.

Consequently, it is necessary to mitigate the impact of client emotions. Emotion mitigation is a fact of life in the investment industry and both advisors and investment managers should develop such skills. The goal is to be sensitive to the emotional reactions of clients while minimizing the damage to their portfolios. Developing an approach that keeps clients in their seats while building superior portfolios is important for clients, advisors and investment managers alike.