 To stay young and hot our so today is my brain made me do it and well I'm your host Maria Mena and I'm also a financial advisor with Edward Jones so today I'm taking a little bit of advantage of that and the reason why we are having the so today my brain made me do it is because we like to explore how to stay healthy how to stay emotionally healthy financially healthy physically mentally healthy so we are exploring today how to check half our brains in check and I invited my guest Christopher Bertorelli Christopher works as a vice president regional vice president of one of the best mutual funds in the US at John Hancock so Christopher thank you very much for joining us today thank you for Maria it's a pleasure to be here of course thank you for for allowing us to hear this I know John Hancock has done a lot of research into this matter so tell us a little bit more on what are you exploring and what are you trying to to find out yeah you know it's it's interesting I've been in the business since 1993 and I've been through three really bad bear markets and a number of corrections and you know people continually make the same mistakes over and over again so we've done some research to try to identify people why people do or make decisions that in retrospect they regret I mean we're we all know we're supposed to buy low and sell high right yeah that's it's simple but it's not easy right because yeah it goes down when we're all supposed to be programmed to buy there's not a lot of great news out there and especially now right that we've had a really tough year the virus there the elections the everybody's I think a little bit anxious and a little bit emotional about your decisions with everything and especially your investments so that's that's what I want to explore with you if you can help us identify that those how to how to keep that brain in check oh yeah we be happy to yeah yeah and and and I forgot to tell that you've been working for John Hancock for 15 years but also right before you were working for another one of the I understand is the the old days mutual fund right MFS yes it is yeah so you're you're the right person to help us here well I'll do my best today I'll do my best thank you very much okay so tell us how do we make decisions how I heard something the other day that I'd say they were saying 95% of the times humans do take decisions with emotions but then they justify them with logic it does that resonate with you or yes for sure for sure it's like when people buy automobiles right you know they buy on emotion and then they justify with facts afterwards to justify that emotional purchase the way you know the way we make decisions there's two ways we do it there's either intuitive or reflective and so intuitive decisions are just snap judgments and that's okay if I'm just trying to pick a shirt that I'm going to wear today I mean it's not a big deal because the consequences aren't great it's just a shirt I mean the people with might decide they like it or not like it but at the end of the day it's not a it's not a critical decision that is that going to have a major impact on my future when we make important decisions we should make those reflectively when we make a reflective decision we take our time we do some analysis we we weigh the different options and so when we make important decisions we really should make those decisions reflectively but sadly when we're under pressure and stress when we're nervous so think about you know the markets going down and maybe you get your statement and you look at you know what your account was worth the previous quarter and what it's worth now and you're seeing all this bad news on the on the TV and you're reading bad stuff in the newspaper and on the internet and that type of thing you start to get anxious and we we are influenced by biases emotional and cognitive biases and so how how do we identify those biases tell us one bias that you that you can identify so yeah so I would say like probably my my favorite bias is because and it's probably because everybody can relate to it is loss aversion I mean people don't like to lose right but the psychological impact of a loss can be twice as powerful as the impact of a game and they actually test this so they have test subjects and they give them a series of options so one option might be you know if I have this coin in my hand and I flip it and it comes up had you win $200 but if it comes up tails you lose a hundred now that's a pretty good bet because you have a 50% chance of winning and if you win you'll win twice as much as you lose but studies show most people won't take that bet so now you might be thinking well why is that such a big deal right well the reason is it's because loss aversion leads to poor investment choices specifically investing too conservatively given our time horizon so yeah see keep going please I was going to ask so you're saying would that be also like gambling or is are we making a difference between investing and or is a general thing no it's just a general thing it's just that example I gave you with the coin is just an example of a test that they use to gauge people's ability to take the chance at a loss that's all that is but it does give you a sense that you know a 50-50 bet and where you could potentially win twice as much as you lose and most people will not take that bet gives you a sense for the fact that you know most of us are loss averse you know we we strongly prefer avoiding losses over acquiring gains and and like I said that the challenge is it leads to poor investment choices specifically investing too conservatively given your your time horizon and and when we are feeling this this sense of loss aversion office oftentimes instead of making our next choice being reflective it's it's it's intuitive it's like a snap judgment which which is not you know not a good way to invest for sure so how do how do I do I identify if I'm under the influence of that loss aversion how do how can I identify that yeah that's a that's a great question so basically if you find yourself saying or thinking something like this right I'll give you a couple of examples so if you find yourself saying or thinking something like I can't sell now it's down too far it'll come back eventually this speaks to investors tendency to hold on to bad investments too long I mean the reality is we have a diversified portfolio for a reason we understand that not all those investments are good and it's important to recognize when okay this one didn't work out don't beat yourself up but you know it might be time to sell that and move on to something that might be better and people you know they they just don't want to admit they made a mistake and they don't want to lock in the loss conversely it's funny investors tend to sell good investments too quickly so they invested something that's actually a high quality and it starts to go up and then their reaction is to sell it because they don't want it to go down and they don't want to lose the gain that they've been able to acquire something else if you find yourself thinking or saying I don't mind staying in cash the markets have been crazy lately I'd rather be safe you know clearly if you're thinking or saying something like that you're you know you're under the influence of loss aversion and sadly a lot of people do that after the markets already gone down we'll talk a little bit about that later on so what what do I do about it if I if I recognize that I am under the influence of loss aversion and how do I go about it yeah you know you know that's a great question I love that question because it's really critically important I think it's easy to identify whether or not you're under the influence of the bias but the critical thing is okay now what do we do about it I see the first thing to do is just don't be prepared for market volatility just expect it embrace it it comes with the territory if you can invest in stocks the mark you know the markets going to go down I've been in the business for 27 years and I've seen three really bad bear markets and a number of different corrections and you know that's not going to stop I mean that's going to continue to happen I don't know when and not all much but it'll continue to happen now I think it's easier for people to embrace volatility and the fact the market will go down if we if we dive into the subject a little bit more so I've got some statistics I want to share with you today so bear markets when the market goes down 20% or more so when I say the market I'm talking about you know the S&P 500 which is an index of the 500 largest companies United States when the market goes down 20% or more that's a bear market so if we go back to World War two there's been 12 bear markets they last on average about 14 months and the market goes down about 28% and so you might be thinking wow why would I ever subject a portion of my capital to being down potentially as much as 28% and I'm actually sitting here telling you to just expect that that's going to happen and I don't know when and I don't know much right well it's sort of like I at least to my clients I usually tell them is it's more like a four-year cycle right like three with years one bad year you never know when that year is gonna happen but sooner or later I'm gonna be right and we're gonna have a bad year so that's right when that bad years happens I mean it's just you know it's it's it's it's gonna happen but like you you know it's interesting you said we know one bad year you know three four good years one bad year well let's talk about those good years I mean if we go back to the World War two there's been 13 bull markets the market goes up on average for 55 months so that's over four years and the market goes up 132% on average so that's more than enough to make up for the fact that a portion of your capital went down about 30 30% so tell us we have to lose a version tell us another bias give us another example sure yeah we can cover how about anchoring I like anchoring a lot because you know anchoring is really important for us it allows us to concentrate and focus right and so when we have a task that's really complex and we need to really concentrate to come up with a solution it was really important the problem with anchoring though is if we anchor too much on one thing so if we if we take one factor and believe it's going to have an outsized influence on how what what an outcome is like and that's you know then that's a problem so you know you look at you know like in the 70s we had a really bad bear market the market went down like 47% and the 70s was a pretty tough time I was born in 67 I remember that and you know we had the end of the Vietnam War that didn't go well we had a president that was forced to resign we had an oil embargo you can only buy fuel every other day based on the last digit on your license plate so it wasn't a great environment for our economy and we had a condition that economists call stagflation so stag and growth and very high inflation unemployment was really high if you wanted to get a mortgage for your house it was like the rate was like 14 15 16% and the market like I said it went down 47% if you just focused on that drop you might never invest in equities again but over that period since 1974 you know the market has done phenomenally well and so you know so is that is that kind of what you think we will look at when we look at March of 2020 that will be like wow that was a drop but at the end of the at the end of the day looking at a 30-year picture it will be just another bump yeah without question I mean a lot of people look at the decade of the 2000s right so that people call that the last decade you know we have the tech wreck the market went down 48% peak to trough and then the financial crisis the market went down 56% peak to trough but that was actually a great opportunity to buy right by a low sell high when the market goes down yeah we don't try to time the market you just rebound your account just to make sure it's still consistent with your risk tolerance and time horizon and that actually represented a phenomenal opportunity for long-term investors to experience gains in the stock market. I think it's kind of what happened this year too so that's a great example so again tell me how how do I know how do I recognize I'm I'm being influenced my my brain is taking me to that anchoring yeah so I think if you find yourself thinking or saying something like you know I'm still down 10% I just want to get back to where I started so there you're just you're basically anchored on a dollar amount and you're not thinking about what's really important what's really important is you know what what is your financial goal and are you getting closer to that goal so we we recognize you know when you do a financial plan which is really important something like the financial foundation the five-step process that they have at Edward Jones which is phenomenal you basically identify what your goals are and you and you set a rate of return you identify a rate of return that's going to be necessary in order for you to reach your financial goal but you're not going to get that number every year sometimes you get more than that sometimes you're gonna get less right so we had just a snapshot in time if you looked at at a part of your portfolio look hey I'm still down 10% I just want to get back to where I started you're really not really focusing on what's really important that's are you are you still on track to reach your goals or six months ago I had X and now I have half that amount again you're not focusing on your goal which is the most important thing you're really focused on a percentage or a dollar amount so how what do we do about it just try to is there any any any advice for us if we oh yeah for sure yeah I would say there's there's really you know the big things you want to do is you want to keep an open mind and seek out some information to give you perspective and change your anchors and I and I can give you one example that covers all three of those so and this is really should be fresh in everyone's mind right so earlier in the year you know COVID was something new and we're all trying to kind of wrap our brains around what the impact was going to be not you know on our health and our family's health and our friends and and then the economy right and so we saw the market I mean it peaked on March February 19th and then it dropped it dropped 32% from February 19th to March 23rd and that's a really big drop in a very short period of time and so a lot of people were anchoring on you know COVID 19 the coronavirus and the impact it was going to have on the economy so people panic and they sold their investments and so they were really anchored on that one factor but they weren't considering that there were outside factors that could also influence the outcome and that you know the big factors that influence the outcome and a big reason why the market is but it's sitting like new highs it seems like every day the market's up you know over 50% since the trough and that's the government's response so there was a fiscal and monetary response by the government which is really massive massive and unprecedented scale so you have monetary policy that is the Federal Reserve that's Jay Powell and they could he controls monetary policy which is basically he tries to influence interest rates so if they think the interest the economy is going to slow down they try to influence interest rates so they're a lower so it makes it cheaper for us to borrow so it's easier for us to buy cars and houses and borrow money to read model our homes and that type of thing and so they did that and then they also created some liquidity facilities and significantly lowered anxiety in the bond market so though and that was really big and then you have the fiscal response that's Congress and the president that's that's spending and they passed the Cares Act which is like 3.3 trillion dollar fiscal stimulus and if you add it all up it's equivalent to about 44% of our nation's GEP which is a huge shot in the arm and so yeah I mean covid's a big thing no question about it from from certainly from a health perspective but from yeah we're more talking about the economy and portfolios and things like that but certainly from a economic perspective but then you've got this other you know the government's response was so massive that's a big reason why the market rebounded so quick and sadly a lot of people you know were caught off guard because they didn't they didn't change the rank or they didn't try to broaden their perspective and and understand that there could be more factors that that are going to influence the outcome that's a big reason why so it's so hard to time the market a lot of people are tempted I'm the market they think they can and I've been doing this for a long time and you know I think it's I think it's very very difficult I think yeah most people are better off just you know have a diversified portfolio that matches your risk tolerance and time horizon when the market goes down you just rebalance and try to add to it it's it's you know it's simple but it's not easy it's it's kind of I know yeah it's definitely very long-term focus on on good quality right like anything focus on good quality long-term and definitely diversification just to just to emphasize what you're what you're saying but I know there is so much but I would like to maybe can you give us one more example of another bias and just just for those who are probably relating and saying yes to everything that you're saying oh yeah sure so I would say another one of my favorites is status quo bias and that's people's tendency not to change an established behavior unless the incentive to change is compelling right it's easier to do nothing we we we don't like change and we're creatures of routine right and so that can be a definitely can be a problem right so so so again I'm just gonna keep asking you the same questions but so how do I how do I identify that I that I am the influence of hand side bias okay so okay so if you find yourself thinking or saying something like I don't care what happens next I'm moving to cash until things calm down or the market's done great this year I knew I should have invested more if you find yourself thinking or saying something like that clearly you know you're you're kind of kicking yourself because you're not really happy with the decision that you made right so it's just regrets exactly kind of okay so one more time how do I how what do I do if I if I identify that I have you know I think I think the the most important thing to do is you know don't beat yourself up regrets about the past and fear the future of the thief of today right Eleanor Rosa said that in the 50s and I really believe that's really relevant when we talk about investing you know we're human where we're gonna be influenced by biases it's gonna cause us to make the decisions that maybe in retrospect we regret but it's important not to waste the day right except the fact that was not a great decision let's try not to make those decisions again and let's put together a plan today that's gonna increase the likelihood that we reach our financial goals so I you're very last night I had ice cream just start your diet start your diet the following day that's right that's right okay so I mean Chris you have covered so much and and every I hope people understand that every one of your sentence is so rich with information and and things that we can reflect and what are there for our viewers and our audience just give us some key takeaways that we can take off all your your of all our conversation today all right great yeah I've got a few things here that I would just want I really think you should try to take with you if you want to get something out of this presentation and benefit from it I mean I think the first thing is and I think if you want to increase the likelihood that you reach your financial goals and you're protected from any type of financial emergency you'll do a financial plan Edward Jones has a great one the financial foundation the five-step process it you know it's it's really it's really critical that's gonna increase the likelihood that you reach your financial goals and if you don't have a financial plan you really should you really should get one and you and you should try not to procrastinate you should get it as soon as you can as soon as you can if you know you're the type of person that gets nervous when markets are volatile you can establish some steps to take when you're in a crisis when you're not in a crisis right so if I know that I'm the type that gets nervous when the market goes down maybe ahead of time I decide well you know what market goes down 10% I'm gonna reevaluate what my risk tolerance and time horizon is or maybe it goes down 20% I'm gonna rebalance my account and make sure that my allocation is still appropriate given my risk tolerance and time horizon just something to give you the feeling of a little bit more control when when there are a wide variety of factors that are making you nervous that you can't control we didn't talk a lot about this but dollar cost averaging programs are really great so a dollar cost averaging program is when you invest the same amount on the same day every month you can do it monthly you can do it quarterly you can do it annually whatever it is but the benefit of a dollar cost averaging program is when the market goes down you just buy more shares at a low price right by low so if you have a retirement plan at work that's what you're doing your employer is deducting capital from your paycheck every pay period and typically that capital is invested in mutual funds and when the when the price goes down you're just buying more shares at a lower price and that keys on to bias as we didn't really talk too much about but status quo bias and procrastination bias so we we don't like change and even if we decide that we should change we typically will procrastinate and so it's great about these dollar cost averaging programs if you have it established before the market goes down because you prefer the status quo you probably not going to shut it off and then even after the market goes down so much that you're really frustrated and you're really starting to get nervous you decide hey I'm going to shut this thing off you'll probably procrastinate and not do it and by the time you get you get down to it the market will rebound and you'll forget all about it so that would say that expect that your portfolio will go down at times that's the other thing we talked about that early in the presentation just kind of you know embracing volatility is really important there's going to be multiple bear markets and corrections in our lifetime we don't know when and we don't know how much but you know it's going to happen as long as we don't panic as long as we just try to add money to our account and rebalance it we should be fine and the great thing about having a financial plan is that it's kind of baked into the plan that there's going to be multiple bear markets and corrections I mentioned earlier when you do a plan you establish what your goals are and your financial planner they know how much capital you have and how much you can save and they can calculate what type of rate of return is required in order for you to reach your financial goal and so maybe it's six percent and so your investments are not going to earn six percent every year some years are going to earn 12 percent and some years are going to earn zero as long as you average six percent you should be fine and so even if the market goes down your portfolio goes down more often than not if you revisit your financial plan you'll find that you're still on track if it's a good financial plan you should still be on track to reach your goals even though your account may be worth less than it was the previous quarter when you looked at it. Okay please we're gonna okay we have like one minute to just one more that you want to say or I think we're giving so much information that I think our viewers are getting the picture but if you want to say one more thing or yes I think we're running out of time. I guess my problem is I like the sound of my own voice I think that's the problem so I do apologize I tend to run on there but I think I've shared a lot of stuff and if anybody has any questions they can just follow them through you and I'm happy to answer any questions that folks have. Thank you very much for your time your hand sides you're saying your knowledge I really appreciated Chris and I know how valuable it is so I really thank you very much and to all our viewers thank you very much for joining us today keep watching us thank you and we will bring guests as knowledgeable as Chris. Thank you very much everyone. Merry Christmas Chris thank you for joining us. Aloha.