Financial liquidity describes the ability to buy or sell something quickly at a fair price. An illiquid asset cannot be so easily sold. For example, real estate is typically an illiquid asset. You may have to wait months to get the price you want. There are three components to the liquidity of securities in general, and stocks specifically: The first is the…
Asset allocation, at its most basic level, is deciding how to spread (allocate) the risk across your investment portfolio: stocks vs. less-risky instruments such as bonds and certificates of deposit (CDs). These decisions will be the primary determinant of your investment performance; i.e., your portfolio’s rate of return. Beyond this seemingly simple decision, you must consider how much to invest in domestic stocks, international…
If you (or someone you know) are having difficulty repaying a loan, consider asking for forbearance. It will likely prove to be the best gift you receive this holiday season. This is a concept that is rarely, if ever taught, in business school. Many (most) college educated individuals in finance may not be familiar with it. Enjoy, and share our discussion of…
FINANCIAL LITERACY AND THE TIME VALUE OF MONEY With interest rates near 14-year highs, we should revisit the phrase, “Time is Money.” You may have even used the phrase yourself. It has special meaning when applied to investing and financial planning. Lyle and I are happy to present our “Time Value of Money” lesson, taken directly from Your Total Wealth. …
Confirmation Bias is the third article in our trilogy of behavioral finance biases affecting financial advisors and their clients. Indeed… that is one of the reasons Smart People Do Stupid Things… Feel free to download copies for yourself, your colleagues and your clients. CONFIRMATION BIAS A BEHAVIORAL FINANCE BIAS AFFECTING ADVISORS AND THEIR CLIENTS David Dubofsky, PhD, CFA Lyle Sussman,…
LOSS AVERSION: A BEHAVIORAL RISK FOR BOTH FINANCIAL ADVISORS AND THEIR CLIENTS David Dubofsky, PhD, CFA Lyle Sussman, PhD You win some and you lose some. For a moment think about how often you’ve heard or used that phrase. Maybe you said it to someone who was just denied a promotion. Or possibly someone said it to you after you lost…
David Dubofsky, PhD, CFA and Lyle Sussman, PhD The increasing interest in decision making biases affecting the financial world can best be documented with this metric: A Google search of the phrase “Behavioral Finance” yields over 5 million hits. A cursory scan of a sample of those links highlights overconfidence as a significant bias affecting both investors and their advisors. Overconfidence…
Financial advisors know that their clients often make investment decisions that may not be purely rational. But because both are human, those advisors are subject to the same cognitive and psychological biases, and irrational decisions as their clients. However, because of their professional training and status, advisors may believe they are immune from irrational biases. This FPA Knowledge Circle Presentation…
Thanks again to Brian Adams for hosting a podcast in which we discussed the importance of combining Financial Literacy with Life Literacy—i.e., Total Wealth. To listen to our discussion, click on: If someone asks you what wealth means for you, what would your response be? The first thing people always associate this term with is money, however, wealth can also be translated into freedom, opportunities, and…
Lyle Sussman and David Dubofsky “Seek first to understand, then be understood.” This fifth of seven habits of highly effective people, as laid out in Stephen Covey’s bestselling book, is crucial for financial advisors who aspire to communicate effectively with clients and to obtain client referrals. But although many advisors implicitly accept the power and wisdom of this habit, they…