Credence Independent Advisors News

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A look into the pension changes of Credence Independent Advisors News

After the end of the budget consultation on 11th June, the Treasury issued its response on the 21st July on pension shake-up, explaining pension changes, which offer a greater deal of freedom for both pension holders and providers. These pension changes are generally all positive and the biggest for more than 100 years. Some of the changes are discussed here.

In order to ensure that all defined contribution schemes are able to offer greater flexibility to their members a permissive statutory override shall be introduced. The benefit of permissive statutory override is that it allows schemes to ignore their scheme rules and follow the tax rules instead; in order to make payments flexibly or to provide a drawdown facility.

According to the government mandating these schemes provide flexible payments, which would be disproportionate. Even though some schemes would like to offer flexibility to their members but due to the legal and administrative costs involved, they would prefer not to amend their schemes. The government under these situations would prefer that the schemes were in a position to provide flexibility without amending their rules.

On the other hand, if the schemes do not offer flexible access, the individuals would be able to transfer between defined contribution schemes up to the point of retirement.

It is also expected that the government would make various changes to the tax laws, in order to allow more freedom to providers to create new and innovative products, which meet the needs of the consumers more closely. These include; allowing lump sums to be taken from lifetime annuities, allowing payments from guaranteed annuities to beneficiaries as a lump sum, where they are under £30,000, removing the 10-year guarantee period for guaranteed annuities and decreasing lifetime annuities.

The real intention behind the new tax rules is to provide people with a greater access to their retirement savings. However, they also ensure that individuals do not use these new flexibilities to avoid tax on their current earnings by diverting their salary into their pension with tax relief and then immediately withdrawing 25 percent tax-free.

Those who choose to draw down more than their tax-free lump sum from a defined contribution pension will be able to benefit from further tax-relieved pension saving, and make further tax-free contributions to a defined contribution pension of up to £10,000 a year.

Under the current rules, those who are currently in ‘flexible drawdown’ are not able to make further pension contributions, having an annual allowance of £0. However, from April 2015 they will be subject to a new annual allowance limit of £10,000. This would allow individuals accessing a defined contribution pension worth more than £10,000 to contribute up to £10,000 a year with tax relief to a defined contribution pension, after their first flexible withdrawal.

Without being subject to a £10,000 annual allowance on subsequent contribution, individuals can make withdrawals from three small pension pots and unlimited small occupational pots worth less than £10,000.

Other proposed changes under the new tax rules include the increasing of minimum age at which people can access their private pension from 55 to 57 in 2028 for all pension schemes. However, this change will not be applicable to those in the public sector; which includes police, armed services and firefighters.

According to the government, when the new system is established in 2015; the 55 percent tax charge on pension savings in a drawdown account at death will be too high. As a result, in this year’s autumn statement; the government has intentions to announce the changes.

The government will introduce two new safeguards to protect individuals and pension schemes, but will continue allowing transfers from private sector defined benefit to defined contribution schemes, apart from pensions that are already in payment.

Prior to accepting a transfer; an individual would be required to take advice from a professional advisor, authorized by FCA and independent from the defined benefit scheme.

Currently, if the interests of the members of the pension fund trustee or the scheme are prejudiced by making the payments within the usual period, than they can ask the regulators for a longer time to make transfer payments. However, now there will be new rules for delaying the transfer payments for trustees and the scheme funding levels when deciding on transfer levels will also be taken in to consideration.

For those defined members who wish to access their savings flexible, the government has intentions to consult on removing the requirement to transfer first to defined contribution schemes.

Since, there is no money involved in transfers from unfunded public service defined benefit schemes; therefore, the government intends to consult on removing it. However, transfers from funded defined benefit to defined contribution schemes will be allowed, and safeguards similar to those in the private sector will be introduced where appropriate.

Under the trivial communication and small-pot rules, individuals are allowed to take up to £30,000 of total pension savings as a lump sum, or a £10,000 small pot as a lump sum regardless of total pension wealth. The age at which an individual can make use of these rules will also be lowered from 60 to 55.

Credence Independent Advisors News was born from a compelling opportunity in the financial services world. In the ever changing dynamic world of financial services, it is important for us to tailor advice and solutions to individual needs.

Credence Independent Advisors News - The Economic Recovery of the United Kingdom during the First Half Of 2014

The economic growth of a country comprises of a large number of different factors and a combined effect of all the factors makes the final impact. Similarly, in order to understand the economic growth of United Kingdom, it is important to identify the performance of various factors regarding the economy such as unemployment, investments, gross domestic product, inflation, productivity, consumption and many more.

Overall, it has been observed that the economic factors have been moving in a strong and positive direction for the economic conditions of the United Kingdom, with the United Kingdom economy starting to flourish once again and recovering from recession. According to a recent report from the Bank of England, the strong performance of United Kingdom’s economy has proceeded. The results for the first quarter of the year show an increase of 0.8% economic growth with production increasing drastically, unemployment falling further and inflation nearing the 2% target.

The United Kingdom’s production is assessed to have grown by 3.1% up to the first quarter of 2014, with a few pointers indicating significantly stronger growth. The Purchasing Managers Index survey has pointed out that the manufacturing sector has started to flourish with the manufacturing output increasing for continuously over a year now, according to Market. This increase has led to the creation of jobs at a speedy rate in the manufacturing sector for over three years now.

Employment has also increased rapidly. The labour source survey shows the unemployment rate falling beneath the Marginal Propensity to Consume 7% threshold in February. This is now considered to be the lowest recorded in the period of the previous five years. As a result, Goldman Sachs has predicted a fall in unemployment from 6.8 to 6.5% for the current year.

Goldman Sachs has predicted a fall in the Consumer Price Index inflation forecast for the current year from 1.7% to 1.5 %.

Housing market restoration is in process with transactions up by a third over the previous year. Housing costs are up around 10% higher broadly underpinned by strong growth in housing investment.

Having been exceptionally frail over the last three years, private sector pay growth has started to grow, in spite of the fact that it stays well beneath the predicted standards.

Lastly, Sterling has reached its highest level against the United States dollar in the six year period at $1.7149, with 10% appreciation over the previous year.

The economy of United Kingdom has done exceptionally well in the first half of 2014. As a result of which even the analysts at Goldman Sachs have upgraded the United Kingdom economic growth forecast. Analysts have now predicted that Gross Domestic Product will grow by 3.4% this year instead of 3%.

Credence Independent Advisors News was set up to be compelling for all its stakeholders; including clients, staff and owners of the business. We offer a compelling experience to our clients that deliver what they desire. We strive to fully understand our clients’ financial requirements by remaining in close communication with them over the entire span of the relationship. We endeavor to provide our clients with a financial educational framework which supports them in their investment decision making process, helping them to achieve their financial goals. We align our interests along with those of our clients to ensure the development of a long and fruitful relationship.

Credence Independent Advisors News: Active or Passive what’s For You?

What do active investors do?

Active investors believe that markets are “inefficient”. They believe that at any point in time, there are always some securities that are mis-priced, enabling them to buy or sell making a profit. Professional active investors devote unbelievable amounts of time and resource towards trying to find that extra edge. They will then trade in and out of those securities to try and generate profits above the benchmark. They pour over company financials, visit with competitors, study all the latest economic releases, and try to predict everything from corporate earnings to the direction of interest rates and currency movements.

What do passive investors do?

Passive investors believe that markets are “efficient”. They believe that over the long run, the price of stocks and bonds reflect the true underlying value of those securities. As such, they do not seek to beat the market, but rather to “be” the market. They do this by using index funds and ETF’s (exchange traded funds) that mimic various components of the market. For example, rather than try to find that “next Apple or Google”, you can purchase (nearly) all large US stocks or (nearly) all small emerging market stocks in one go by buying the index in it’s cheapest form. Then, using the right asset allocation, they can create portfolio that has an appropriate risk exposure for the client.

Which style of investing performs better?

Passive investors outperform active investors more often than not. In the past 5 years, 75% of US Large Cap funds, 90% of US Mid Cap funds and 83% of Small Cap funds failed to beat their comparable indices. One reason for this may be the fact that market surges (up or down) are unpredictable missing just the top 25 days of market performance over the last 40 years would result in you having 3.6% less per year than if you had just stayed the course.

Which style should you use?

Investing in both active and passive investments makes sense. In smaller more specialist areas of investment it can sometimes be difficult to find the right passive investment. In larger markets ETF’s and indexes can be cheaper and more efficient. There are a variety of measures to make the right decision. Consult with a professional to show you the options. If they aren’t clear then be passive with them.

Credence Independent Advisors News was born from a compelling opportunity in the financial services world. In the ever changing dynamic world of financial services, it is important for us to tailor advice and solutions to individual needs.

Credence Independent Advisors News: Eurozone Needs an Unconventional Approach to Its Economic Crisis

Mario Draghi, the head of ECB calls for more unconventional and growth friendly policies to end eurozone crisis.

Within the Eurozone, it has been a long-time since the living standards were at peak. For instance, the living standards were last at their peak in 1997 in Italy, 2000 in Cyprus and Portugal, 2001 in Greece, 2003 in Spain and Ireland and 2006 in France. Out of all the eurozone countries bailed out since eurozone debt crisis, Italy has been the only country to witness the worst performance and is now in the final stages of its two lost decades.

Last Friday, at his speech at the Jackson Hole symposium, Mario Draghi, the Italian in charge of the European Central Bank emphasized on the need for more growth-friendly policies. He further went on to make an unfavorable contrast between the eurozone and the US. For instance, during the great recession of 2008-2009, both the US and eurozone witnessed a rise of five percentage points in unemployment. However, unemployment has since fallen by four percentage points in the US, but is still more than four points higher for the eurozone. Furthermore, the US is witnessing an increase in the growth this year after being affected by weather in the winter season, whereas in the eurozone, the growth is at a standstill, along with growing deflationary pressures.

The most vulnerable threats to the eurozone currently are both economic and social.

The economic threat is that prolonged stagnation along with outright deflation or very low inflation puts pressure on the already stretched public finances. This is because inflation decreases the burden of debt, whereas deflation increases it. When it comes to countries like Italy, where the national debt is more than 100% of the annual national output, keeping interest rates high could eventually become unsustainable.

When it comes to social threat; high unemployment leads to social unrest in the society, such as the one seen in Ferguson, Missouri recently. Currently the inequality levels are not as high in Europe as in the US. However, they might become so over time. Therefore, stagnation in the economy, very high levels of unemployment and increased concentration of wealth are the main causes of social unrest and prevent achieving social harmony.

One of the reasons for the slower growth rate of eurozone compared to the US is that the US has a rising population whereas Europe doesn’t. Therefore, one option is to sort out Europe’s structural problems.

On the other hand, eurozone has a lot of laws, which prevent the full implementation of the single market and eventually act as a hurdle for growth. These include over-restrictive labour laws, too many protectionist tendencies and too much bureaucracy.

Austerity has been used by Germany as an important tool to force unwilling governments in Southern Europe to embrace structural reforms. Currently Germany would want to impose austerity on France. However, Draghi’s comments at Jackson Hole suggest that austerity is not helping structural reforms, instead Germany is becoming isolated. Furthermore, according to economist Vicky Pryce, austerity is turning Europe into a big debtor’s prison.

Even the ECB has now accepted that it would have been better to have followed the American approach to recover from the recession without worrying too much about how much money the Federal Reserve was printing or the size of budget deficit.

When we compare the economic recovery of the US and the eurozone, it is important to note that the eurozone is not lagging behind just because of the difference in the population size and growth, but because of tighter fiscal policy for too long, the ECB being slow and unwilling to try something different just like the Fed, Bank of England and Bank of Japan.

As seen previously, Europe won’t be taking a bolder approach; rather it will be taking small steps. Things such as state finances will be utilized for growth, such as for infrastructure building. Budget rules might be temporarily relaxed to allow countries to run deficits of more than 3% of the GDP (gross domestic product) without facing possibility of sanctions. When the Germans agree, the ECB will announce a modest quantitative easing programme; to buy bonds in exchange for money from the banks to help increase flows of credit around the eurozone economy.

We don’t know whether this will resolve the problem or not. However, this certainly won’t do any harm. For sure it is not the complete solution. The European banks are badly run and were even worse than their British and American counterparts, even years before the crisis. As a result they are slow to raise capital and repair their balance sheets.

As for QE, since it has not worked well, especially in the US or UK, where the banks are in a better shape. Therefore, an ECB QE will be less effective given the current status of the European banks.

Eric Lonergan (a London based hedge-fund manager) and Mark Blyth (economics professor at Brown University) have proposed an alternative of printing money and handing it straight to the people and cutting the middleman. To curb growing inequality, Lonergan and Blyth propose that the central banks should directly give a cheque to every household instead of pursuing policies that ramp up asset prices and make the financial system less stable. The benefit of this is that the people would spend rather than store, like the banks. As for the inflationary pressure, higher interest rates can be used to counter them.

It is important to note that Germany wouldn’t allow any such plan because Angela Merkel considers a reminiscent of the 1923 hyperinflation.

Draghi himself is aware of the need for a new different approach and is preparing more unconventional measures.

Why Us

Credence Independent Advisors News was set up to be compelling for all its stakeholders; including clients, staff and owners of the business. We offer a compelling experience to our clients that deliver what they desire. We strive to fully understand our clients’ financial requirements by remaining in close communication with them over the entire span of the relationship. We endeavor to provide our clients with a financial educational framework which supports them in their investment decision making process, helping them to achieve their financial goals. We align our interests along with those of our clients to ensure the development of a long and fruitful relationship.

Credence Independent Advisors News: Britain’s top spending tourists are Middle East Visitors


According to ‘Visit Britain’, the national tourism agency of Britain; tourists from the Middle East are Britain’s top spending international shoppers


The survey shows that tourists from the Middle East are twice as likely as typical visitors to buy clothes and shoes. Kuwaiti visitors rank number one in terms of spending on shopping in the UK, followed by Nigerians in second place and Saudi Arabians in third place. A visitor from Kuwait on average delivers £4,000 to the UK economy, whereas a visitor from France delivers an average of £343 to the UK economy.


According to Global Blue, which tracks spending by overseas visitors, the lead-up to Ramadan is traditionally a key holiday period for luxury retailers and hotels as tourists from the Middle East come to the UK for their annual spending spree, escaping soaring temperatures at home. As a result of which London witnessed an increase in visitors from the Middle East, just before Ramadan this year.


According to Global Blue, wealthy Middle Eastern shoppers favour luxury brands, with more than half claiming shopping to be their favourite activity when visiting the UK. This is evident from the fact that the average transaction value of Middle Eastern shoppers in 2013 was £795.


The high spending of Middle Eastern shoppers has influenced the UK luxury retailers also, with some luxury retailers, including Smythson and Temperley, offering special experiences and bespoke products designed for Middle Eastern shoppers this year.


The pre-Ramadan influx of Middle Eastern visitors has also changed the way that luxury stores do business. With Ramadan starting earlier, luxury stores now tend to start their summer discounting earlier, and opt for short, sharp, sales periods, so that new season styles are in stores when visitors from the Middle East arrive.


Even though Middle Eastern visitors spend the most when it comes to cutting edge fashion, Visit Britain found out that they don’t spend much on British food and drink.


When it comes to spending on British food and drinks; 34% of Belgians, 32% of French and 32% of Japanese visitors are most likely to buy British food and drink to take home.


In 2012 alone, international visitors spent £4.5bn in British shops, which was a quarter of total expenditure by foreign tourists that year.

Credence Independent Advisors News:  A Look at FATCA (Foreign Account Tax Compliance Act)


The United States global tax law; Foreign Account Tax Compliance Act (FATCA), came into effect on 1st July 2014. The FATCA is at last here after a period of 4 years, initially developed in 2010 as an approach to make America’s corporations and private individuals stop evading America’s taxes by depositing their money into their accounts in foreign countries. The act requires foreign banks and foreign financial institutions to inform about every American who owns an account and even to hold back money from those particular clients who are suspected of tax evasion to the Internal Revenue Service (IRS) in the United States.


The IRS and Treasury have important FATCA projects to complete. The IRS still has to bring up to date its withholding agreements for Withholding Foreign Trusts and Withholding Foreign Partnerships to depict FATCA, which it has guaranteed for July. In addition, there are numerous areas where the IRS and Treasury still have to make alterations as promised to the FATCA policies.


For over a year, America has been busy negotiating; information sharing policy with countries around the globe, and up till now, 77,000 financial institutions and 86 countries have registered for FACTA. The countries which have already reached official or opening agreements with America also include China and Russia.


In spite of the alteration period rules, United States and Foreign Financial Institutions withholding agents have yet to put up efforts to put the FATCA rules as of July 1, 2014 into practice. The efforts consist of training sessions with employees, instruction manuals and modifications to policy manuals that would make the workforce aware of the requirement to file customers’ FATCA status on opening accounts. Furthermore, the withholding agents of Foreign Financial Institutions and United States will be made to keep an account of the efforts made in a file for trouble-free access. As the IRS agents may ask for evidence of a party’s efforts in good faith to operate in accordance with FATCA.


Lastly, provided that a withholding agent selects not to be indulgent regarding FATCA documentation, parties should in general consider to be required to give the documentation to the mediator.


Collecting tax is one of the most common ways of increasing revenue for a nation. FATCA grew out of a contentious rule; that the citizens of America, even if they are permanent residents abroad are taxed on their all-inclusive, global income despite of where they live. It also helps a country to keep check on spending and saving capabilities of their citizens. Hence, it could be highly important for the economic survival of a nation and for the better living standards of their citizens. If not financially sound, a country risks its citizens living in an unsecure environment. Therefore, it is important for governments to properly manage their tax processes in order to avoid any lack of management.


Credence Independent Advisors News was born from compelling opportunity in the financial services world. In the ever changing dynamic world of financial services it is important for us to tailor advice and solutions to individual needs. See more of us at Wattpadd and Scribd.


Credence Independent Advisors News: 209,000 jobs added by US economy in July


July witnessed an addition of 209,000 jobs by US, showing that the US is on its course of economic recovery.


The manufacturing and professional business services sector witnessed the biggest job gains.


There has also been a slight increase in the US labour market, which will encourage workers who have given up job hunt to enter the job market once again.


According to the Commerce Department, during the period April to June, the US economy grew by a better than expected 4 percent.


However, the latest data from the Bureau of Labour Statistic has shown that the unemployment rate has slightly increased to 6.2 percent.


The job data for May and June was also revised upwards to show that the US economy added 15,000 more jobs for May and June.


Variations along the way:


Even though some economists had been expecting higher figures, the US stock markets were below the less than expected gains.


Following steep losses the day before, the Dow Jones 100 Index fell down by almost 80 points.


Most analysts were of the view that there was nothing negative about the report. Jefferies, the US investment bank, in a note to clients stated; “The downward trend [in the unemployment rate] remains intact, but there will be bumps along the way to normalcy.”


One of the possible reasons for the increase in the unemployment rate could be the fact that July is often one of the weaker months in terms of job growth. Nonetheless, the job figures for July are indeed encouraging, because the US economy just needs to add at least 150,000 jobs each month in order to keep up with the population growth. Furthermore, July is the sixth month in a row when the US economy has added more than 200,000 jobs.


This shows that the US is indeed on its course of economic recovery.


The need to still push on:


Janet Yellen, the US Federal Reserve chair, recently expressed that even though employment data is better than the one witnessed after the 2008-2009 recession. However, there are still some issues and challenges remaining. For instance, the wage growth still remains flat. Similarly, the number of long-term unemployed (people who are out of work for longer than six months) is also the same at 3.2 million (one-third of those looking for work).


In a recent interview with the New Yorker magazine, Janet said “Imagine I’ve got my hands on your shoulders and I’m pushing you.”


“In the aftermath of the financial crisis, I was pushing you so hard; you couldn’t get to where you wanted to go. Now that the economy is recovering I’m pushing you a little less hard, so you’re able to make some forward movement. But I’m still pushing you.”


A recent job fair in Boston, Massachusetts witnessed this sort of tension, where only a handful of employers had to deal with an overwhelmingly huge number of resumes.


According to an unemployed job seeker, Dwayne Burgess; “It is very tough out there – employers now have a ton of people to search through and they’re looking for that perfect person and you really have to be competitive with that next person in front of you.”


Credence Independent Advisors News: June Witnessed a Rise in UK Mortgage Approvals for the First Time in Four Months


The UK mortgage approvals did see an increase in June, after four months, but were still 12 percent lower than January highs.


The UK mortgage approvals saw a rise in June, after declining from February to May; amid new stricter lending rules imposed by banks.


According to the Bank of England, after a four month decline and witnessing an 11-month low of 62,007 in May, the mortgage approvals rose to a four month high of 67,196 in June.


The implementation of tighter lending policy at the start of the year by high street banks and building societies was responsible for the changes witnessed in the mortgage approvals over the first two quarters of the year. The introduction of the Mortgage Market Review in April, which was designed to curb the excessive lending seen in the run up to the last housing market crash, further compounded the situation.


Mark Carney’s view of the hot housing market being the biggest threat to the UK’s economic recovery has further frightened buyers and lenders. Even though there has been an increase in the mortgage approvals for June, the approvals are still well below the 74-month high of 76,214 seen in January. This points out that the demand has declined because of record prices and the fact that under the new rules fewer people are managing to secure a mortgage.


The housing market has also witnessed some changes, with Rightmove reporting the first asking price falls of the year at the start of July and Hometrack announcing that it is now taking twice as long to sell your house in London as it did in March.


Howard Archer, chief economist at IHS Global Insight says “Nevertheless, the appreciable rise in mortgage approvals reported by the Bank of England in June fuels uncertainty as to whether the recent loss of momentum in housing market activity is likely to be lasting or just a temporary development related to changing mortgage regulations, and whether there will be a significant easing back in house price growth.”


Archer further adds on that “We take the view that while house prices will highly likely keep on rising over the coming months, it is probable that the gains will be more restrained compared to the recent peak levels.”

Credence Independent Advisors News: Global Equity Markets at Their Best in August, After Five Months


The trading for the month of August ended on Friday the 29th, witnessing a rise in the global equity markets, reaching their peak in five months, since February. The rise was attributed to the strong U.S. data and German bond yields rising up from their record lows, amid expectations that the European Central Bank (ECB) would ease monetary policy next week, fading away.


The S&P 500 index; which is the U.S. benchmark, ended on Friday above the 2,000 milestone for the third time, setting a new closing high. The rise in the S&P for August is the best since February.


The euro-zone inflation fell down to its five-year low, which initially caused European shares to decline. However, the improvement of the U.S. economy caused the European shares to bounce back again. According to analysts, the decline in the euro-zone inflation was unlikely to lead ECB in to taking any action any time soon.


The U.S consumer spending also rose to a seven-year high in August, after witnessing a decline in July for the first time in six months; suggesting that the decline was most likely temporary. There was also a rapid rise in the factory activity in the Midwest, emphasizing the U.S. economy’s relatively strong fundamentals.


According to Andre Bakhos, the managing director of Janlyn Capital LLC “Economic numbers have been positive for the most part, people are drawing comfort from these numbers, using them as a justification for optimism.”


Wall Street and European stocks closed higher, with .MIWD00000PUS (MSCI’s gauge of worldwide stock performance) rising 1.9 percent in August, its best monthly performance since February. However, Wall Street outperformed European stocks by closing higher in August. For instance, the Nasdaq Composite .IXIC rose by 4.8 percent, the S&P 500 .SPX gained 3.8 percent and the Dow Jones industrial average .DJI climbed 3.2 percent.


The index of top European shares; the FTSEurofirst 300 .FTEU3 index closed up 0.33 percent at 1,373.82 points. The Euro STOXX 50 .STOXX50E rose 1.8 percent in August, its biggest monthly gain since February.


The start of the week witnessed a sharp decline in the European bond yields across the euro zone after Mario Draghi (President of ECB) highlighted a significant drop in inflation expectations. His comments also raised expectations that the ECB would deploy quantitative easing (QE), which is large-scale purchase of assets. These expectations helped in boosting enthusiasm for stocks, both in the euro zone and the U.S. and also weakened the Euro.


However, according to Wouter Sturkenboom, investment strategist at Russell Investments “What people realize is that for the ECB to engage in public-sector QE … the ECB has to see the whites of the eyes of deflation.”


After the report on euro zone inflation, the Euro rose to $1.3195. However it later retreated and fell down to $1.3139.


The benchmark 10-year U.S. Treasury notes US10YT=RR seesawed, falling 2/32 in price to push its yield up 2.3431 percent.


The benchmark for euro zone borrowing costs; the German 10-year Bund yields DE10YT=TWEB, rose half a basis point to 0.891 percent, having hit a record low of 0.86 percent on Thursday.


With the Midwest manufacturing data pointing to a stronger demand, the U.S. crude oil rose for a fourth straight day.

Credence Independent Advisors News: Key Considerations of Behavioral Finance

The central issue in behavioral finance is explaining why market participants make systematic errors contrary to the assumption of rational market participants. Such errors affect prices and returns, creating market inefficiencies. It also investigates how other participants take advantage (arbitrage) of such market inefficiencies.

Some of the following traits know as heuristics follow.

Psychology concepts that affect the way you manage your investments.

In psychology and more specifically Behavioral Finance, heuristics are simple, efficient rules of thumb which people often use to form judgments and make decisions. They are mental shortcuts that usually involve focusing on one aspect of a complex problem and ignoring others. These rules work well under most circumstances, but they can lead to systematic deviations from logic, probability or rational choice theory.

The resulting errors are called "cognitive biases" and many different types have been documented. These have been shown to affect people's choices in situations like valuing a house or deciding the outcome of a legal case and in making financial decisions. Heuristics usually govern automatic, intuitive judgments but can also be used as deliberate mental strategies when working from limited information.

"Investors are 'normal,' not rational." Behavioral finance reconciles the discrepancy between rational valuation and irrational market pricing. It's a booming field of study. Top behavioral finance gurus include Yale's Robert Shiller and GMO's James Montier.

There are several common behavioral biases that drive investor decisions.

Availability Bias is the ease with which a particular idea can be brought to mind. When people estimate how likely or how frequent an event is on the basis of its availability, they are using the availability heuristic. When an infrequent event can be brought easily and vividly to mind, this heuristic overestimates its likelihood. For example, people overestimate their likelihood of dying in a dramatic event such as a tornado or terrorism. Dramatic, violent deaths are usually more highly publicised and therefore have a higher availability. On the other hand, common but mundane events are hard to bring to mind, so their likelihoods tend to be underestimated. These include deaths from suicides, strokes, and diabetes. This heuristic is one of the reasons why people are more easily swayed by a single, vivid story than by a large body of statistical evidence. It may also play a role in the appeal of lotteries: to someone buying a ticket, the well-publicised, jubilant winners are more available than the millions of people who have won nothing.

When people judge whether more English words begin with T or with K, the availability heuristic gives a quick way to answer the question. Words that begin with T come more readily to mind and so subjects give a correct answer without counting out large numbers of words. However, this heuristic can also produce errors. When people are asked whether there are more English words with K in the first position or with K in the third position, they use the same process. It is easy to think of words that begin with K, such as kangaroo, kitchen, or kept. It is harder to think of words with K as the third letter, such as lake, or acknowledge, although objectively these are three times more common. This leads people to the incorrect conclusion that K is more common at the start of words.

Investors believe they are awesome at investing

Overconfidence may be the most obvious behavioral finance concept. This is when you place too much confidence in your ability to predict the outcomes of your investment decisions. Overconfident investors are often under diversified and thus more susceptible volatility.

Investors are bad at processing new information.

Being poor and processing new information is known as Anchoring and is related to overconfidence. For example, you make your initial investment decision based on the information available to you at the time. Later, you get news that materially affects any forecasts you initially made. But rather than conduct new analysis, you just revise your old analysis. Because you are anchored, your revised analysis won't fully reflect the new information.

Investors connect the wrong things to each other.

Representativeness - A company might announce a string of great quarterly earnings. As a result, you assume the next earnings announcement will probably be great too. This error falls under a broad behavioral finance concept called “heard investing.” A lot of investors incorrectly think one thing means something else. Another example of representativeness is assuming a good company is a good stock.

Investors absolutely hate losing money.

Loss aversion, or the reluctance to accept a loss, can be deadly. For example, one of your investments may be down 20% for good reason. The best decision may be to just book the loss and move on. However, you can't help but think that the stock might comeback.

This latter thinking is dangerous because it often results in you increasing your position in the money losing investment. This behavior is similar to the gambler who makes a series of larger bets in hopes of breaking even. This Heuristic leads largely into another heuristic known as gamblers Fallacy, which can be best described as flipping a coin 100 times and the first 99 flips have all been tales. Gamblers fallacy indicates that most of us would bet on the fact the next flip has to be heads. Even though the odds have not changed and as a standalone flip of a coin, the odds are still 50/50.

Investors have trouble forgetting bad memories.

How you invest your money in the future is often affected by the outcomes of your previous experience. For example, you may have sold a stock at a 20% gain, only to watch the stock continue to rise after your sale. And you think to yourself, "If only I had waited." Or perhaps one of your investments fall in value, and you dwell on the time when you could've sold it while in the money. These all lead to unpleasant feelings of regret.

Regret minimization (Fear of regret) occurs when you avoid investing altogether or invests conservatively because you don't want to feel that regret. This is the human psyches was of protecting ourselves from unwanted emotions.

Investors are great at coming up with excuses.

Sometimes your investments lose money. Of course, it's not your fault, right? Defense mechanisms in the form of excuses are related to overconfidence. Here are some common excuses:


  • 'if-only': If only that one thing hadn't happened, then I would've been right. Unfortunately, you can't prove the counter-factual.
  • 'almost right': But sometimes, being close isn't good enough.
  • 'it hasn't happened yet': Unfortunately, "markets can remain irrational longer than you and I can remain solvent."
  • 'single predictor': Just because you were wrong about one thing doesn't mean you're going to be wrong about everything else.

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