In June, stocks continued to rally. US small and large caps did best, while international stocks and bonds followed. So far for the year, international stocks have led, followed by US large-caps and bonds. US small-cap stocks have gone down.
Making Good Decisions
According to a Harvard Business Review article from December of 2023, each of us makes up to 35,000 decisions per day. Assuming 16 waking hours, this works out to one decision every 1.5 seconds or so. Because of the sheer volume of decisions we make, most of them happen subconsciously and quickly, based on our prior experiences. Psychologist Daniel Kahneman referred to this as System 1 thinking, used for quick decisions and routine tasks.
On the other hand, System 2 thinking is slower and more analytical in nature. This is the kind of thinking we use for solving more complex problems. For example, a person who wants to lose weight may take the time to plan out their meals and decide where, and how often, to exercise. They may also predict future temptations to cut corners, impacting longer term goals in order to satisfy an immediate craving. To combat this, they might ask friends or family to hold them accountable to following their convictions to be healthier in the long run.
Behavioral finance is the field of study researching how investors make decisions. As you might expect, successful long-term investing requires System 2 thinking. Navigating volatile markets and investment funds requires that we develop a methodology to approach trading decisions like buying or selling. Making quick, emotional decisions tends to result in negative results. So, we try to implement processes that help make more reasoned choices.
One of the ways we do this for you is by periodically Rebalancing your investments. Over time, its normal for certain funds to go up and others to go down. Some may also pay out varying amounts in dividends and interest. Twice a year, in July and January, we review your accounts and reinvest any excess cash back into your funds. We look to buy more of the worst-performing funds at reduced prices. This is not always easy. Many times, it’s tempting to sell an underperforming fund rather than buy more. However, buying helps reduce the average prices of purchase and gives you a better chance of increased future returns as those investments bounce back over time.
Next week we will be reviewing your accounts and placing trades if necessary. If you have any questions about this process, or would like to discuss this in more detail, let me know.
