Iowa Trust Association

Iowa Trust Association
May 2010
May 4, 2010

Hi :

In this issue:
Mark your calendar for 2010 Iowa Trust Conference
Understanding the Pitfalls of Behavioral Finance
It's A Matter of Trust - ITA Offers Brochure to Promote Choosing a Corporate Trustee
Trustcompare.com
Contribute to Iowa Trust Association

Mark your calendar for 2010 Iowa Trust Conference

The Annual Iowa Trust Association Conference will be October 7-8, 2010 at the Marriott Courtyard in Ankeny. Mark your calendar now!

The severe downturn of the financial markets that began in 2007 has led many investors to question their investment strategies and the choices they made in the past. Investment decisions are among the most important life choices a person can make. They may determine where your children will be able to go to college, when you'll be able to retire and the type of lifestyle you'll enjoy after you retire.
.
For these reasons, many investors are now reevaluating their strategies, reassessing their personal tolerance for risk, revisiting their asset allocation strategy and rethinking their long-term financial plans.

In order to make sound decisions in this environment, investors should be aware of their own psychological blind spots. These can lead all of us to make persistently poor financial choices-errors that over time can do significant damage to our portfolios.

Chains of Thought
Traditional financial theory assumes all investment decisions are made rationally, based on the best available information. In theory, the result is an efficient market-one in which prices accurately reflect fundamentals, such as earnings and interest rates.

However, it's not always easy to reconcile financial theory with financial reality. Investors often appear determined to ignore the fundamentals, both in bidding stock prices up and creating "bubbles" only to watch them fall-and often fall dramatically as we have recently witnessed.

"In many important ways, real financial markets do not resemble the ones we would imagine if we only read finance textbooks," notes Richard Thaler, a professor at the University of Chicago and a leading behavioral finance researcher.

It's not that investors are totally irrational, Thaler and other researchers argue, but rather that their thinking can be influenced by mental biases. These quirks can lead them
to make choices that appear intuitively correct, but produce poor performance.

This field is known as behavioral finance and it tries to find explanations for these apparent contradictions. It's not that investors are irrational, but that their thinking may be often guided-or in some cases misguided-by subtle biases and mental blind spots.

Some examples include:

Overconfidence. Investors generally assume they know more than they actually do. They also tend to remember previous investment decisions in ways that exaggerate their own foresight. This can lead to overly aggressive trading and a reluctance to admit-and correct-mistakes.

Mental Accounting. Financial experts often advise investors to take their entire portfolio into account when making investment decisions. Yet, many investors unconsciously divide their wealth into separate pots. If they have a big gain, for example, they may think of it as essentially "free" money and take greater risks with it than they would with their "own" money.

Anchoring. Logically, investors should always base their decisions on current prices and expectations, . Instead, they often become fixed on past events, such as the price they paid for a particular stock. Investors will often refuse to sell at a price lower than that-even when it makes more sense to accept their loss and invest their remaining money elsewhere.

Framing. How people view a decision often depends on how their choices are presented. For example, in one study researchers asked participants how much they would be willing to pay to avoid a one-in-a-thousand chance of being killed. The average answer was $1,000. Participants were then asked how much they would demand to accept the same risk. This time, the answers ranged as high as $200,000. From an economic point of view, the two questions were identical, but subjects saw them very differently.

Loss Aversion. In a completely rational market, the risk of loss and the possibility of gain should carry equal weight. However, on average investors place twice as much importance on avoiding a loss as they do on making a gain. In other words, to accept a 50% chance of losing $100, most people will demand at least a 50% chance of earning $200.

The Value of Advice
Are investors doomed to repeat these mistakes? Maybe not. Some studies have shown that the more investors know about the investment process, the less likely they are to be
misled by behavioral biases.

This is one reason we encourage investors to develop prudent, long-term investment strategies that take into account their goals and tolerance for risk. While this doesn't guarantee investment success, it can at least reduce the risk of being led astray by behavioral blind spots. That's something even the smartest investor may benefit from in today's volatile market environment.

Matt Bral is a Financial Advisor at Morgan Stanley Smith Barney located in Des Moines, IA and may be reached at 515-283-7026 or matthew.g.bral@mssb.com.

Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

© 2009 Morgan Stanley Smith Barney LLC. Member SIPC.

Back to top

It's A Matter of Trust - ITA Offers Brochure to Promote Choosing a Corporate Trustee

Choosing qualified trust professionals is an important part of estate planning. How do you counsel clients and potential clients about the qualities of an effective trustee? To help you the Iowa Trust Association has produced a brochure outlining the qualities of an effective trustee and the advantages of a corporate trustee.

This cost effective brochure is 5½” x 8 ½” and can be personalized with your bank name, address, city state, phone and web address. Educate your trust clients about the qualities that make an effective trustee with these helpful brochures.

Order a supply of these brochures today. To see the complete text of the brochure, go to www.iatrust.com.

Back to top

Trustcompare.com

Trustcompare provides valuable information ranging from broad references to industry standards to specific detail of your strengths and weaknesses. From data submitted by each organization regarding assets, income, expenses and profits, Trustcompare analyzes performance from several perspectives. Trustcompare allows you to compare your trust department performance with that of similar organizations. As a member of the Iowa Trust Association, you will receive 10% off the price. Visit Trustcompare at www.trustcompare.com.

Back to top

Contribute to Iowa Trust Association

As a reminder, the Iowa Trust Association (ITA) welcomes contributors to their quarterly newsletter.If you would like to comment on recent activities in the industry or let us know about an upcoming event that would be of interest to our readers, please feel free to contact Darcy Burnett, at (800) 800-2353 or dburnett@iowabankers.com. Thank you for your interest in our publication and we look forward to hearing from you!

Back to top

To add yourself to this mailing list, click here.
To remove yourself from this mailing list, click here.

Published with Newsletter Ease