Reframing investors choices: Right mindset, wrong market.

A Vangaurd Commentary

By: Francis M. Kinniry Jr., CFA; Colleen M. Jaconetti, CPA, CFP®; Donald G. Bennyhoff, CFA; Michael A. DiJoseph, CFA; and Stephen P. Utkus

Many individuals use decision heuristics, or shortcuts, to make decisions in life ranging from the relatively insignificant (such as choosing a restaurant) to the more significant (such as choosing a doctor). A common shortcut is the use of rating systems based on
the assumption that past performance will continue in the future. Use of this information as part of an informed decision process works well in most areas of our lives; therefore, it is only natural to apply a similar process to investment decision making. However, it often falls short when it comes to making investment decisions.

One way to improve investor outcomes is to reframe the decisions that investors face—away from a past-performance orientation and toward a future orientation. In addition, we suggest that a deeper understanding of the decision-making process using past performance is needed when it comes to investing.

This paper outlines a framework that advisors can use to help modify investor behaviour, including education, communication, and promotion of self-awareness. These aspects support both a long-term perspective and a disciplined approach in the midst of rising and falling markets.