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Oh Behave! How to Manage the Emotional Side of Investing

Investors are oftentimes their own worst enemy. Built-in psychological biases can lead to bad decision-making. At Towerpoint Wealth, we believe that being aware of these cognitive predispositions, and overcoming them, can be the single biggest driver to successfully building and protecting one’s longer-term wealth and net worth.

As human beings, we are hard-wired to avoid pain and to pursue pleasure. Additionally, avoiding immediate pain is much more motivating than gaining immediate pleasure (see Loss Aversion in the list below), all of which is good when hunting, gathering, and surviving in the wild, but not so good when it comes to investing. Fortunately, there are many ways to stop doing foolish things with your money, and being mindful of and avoiding these behavioral obstacles is at the top of the list. Emotional decision-making and poor investor behavior have always been major impediments to successful investing. If we are able to recognize, and to some extent, control our emotions and cognitive biases, the probability of achieving the economic results we desire increases significantly.

Author, artist, and financial advisor Carl Richards coined a phrase known as the Behavior Gap to describe the difference between the higher returns that investors might potentially earn and the lower returns that they actually do earn because of their own behavior. A classic empirical example of poor investor behavior and the Behavior Gap is that of the Fidelity Magellan fund.

From 1977-1990, the portfolio manager for the Magellan fund was Peter Lynch, considered by many to be the best mutual fund manager of all time. During the nine years the Magellan fund was open to the public (1981-1990), Magellan earned an annual return of 21.8%However, Lynch himself pointed out a fly in the ointment – the average Magellan investor only earned an average annual return of 13.4% during the same time period. Money would flow out of the fund during setbacks (i.e. investors were selling low), and money would flow back into the fund during advances (i.e. investors were buying high).

The Fidelity Magellan example and Richards’ Behavior Gap concept provide additional evidence supporting the data found in J.P. Morgan’s chart below:

So what are the behaviors and biases that investors need to consider and be mindful of? Below is a “Top Ten” list (in no particular order) of the most prevalent, and important, ones to consider:

  1. Loss aversion – the tendency to prefer avoiding losses to acquiring equivalent gains
  2. Overconfidence – the tendency for investors to overestimate what they know or are capable of; “I know better than everyone else”
  3. Mental accounting – taking undue risk in one area and avoiding rational risk in others; categorizing money and treating funds differently, depending on their origin
  4. Regret avoidance – not performing a necessary action due to the regret of a previous failure; refusing to admit a poor investment decision was made
  5. Herd behavior – copying behavior of others, even in the face of unfavorable outcomes, and whether or not those actions are rational
  6. Optimism – the tendency to believe that you are less likely to experience a negative event than someone else
  7. Anchoring – relying too heavily on familiar experiences, even when inappropriate; relying on the first piece of information to which we are exposed
  8. Framing – how we alter our decisions depending on how information is presented to us; we react a different way when the same choice is presented in the context of a loss or gain
  9. Hindsight bias – the misconception, after the fact, that one “always knew” they were right
  10. Recency bias – favoring a recent event over a historic one; giving greater importance to a more recent event

At Towerpoint Wealth, we embrace our responsibility to help you, our client, to recognize and overcome these behavioral biases. However, we also understand that our clients are human, and recognize that it is impossible to be completely devoid of the emotional biases that can lead to poor decision-making. We balance that by remaining disciplined and objective as your financial coach and quarterback, and helping you identify, be mindful of, and avoid having these behaviors cause negative impact on your plan, strategy, and decision-making. All of this is in the service of affording you complete economic peace of mind.

What’s Happening at TPW?

The entire Towerpoint Wealth family enjoyed a fun night out together two weeks ago, connecting for cocktails at Zocalo’s downtown location, and then for an amazing Spanish dinner at Aioli Bodega Espanola!

TPW Service Highlight

Unbeknownst to some of our clients, Towerpoint Wealth provides integrated counsel, planning, and expertise in a myriad of real estate-specific areas. Advice on buy or sell transactions and negotiations, mortgage, HELOC, and liability analysis, investment property cap rate and return-on-investment (ROI) planning, 1031 like-kind exchanges, Delaware Statutory Trust (DST) sourcing and due diligence, and real estate tax and estate planning are all areas we regularly help our clients directly manage and care for.

Click HERE to read an excellent Forbes article discussing the importance of combining real estate expertise and financial planning.

Towerpoint Wealth Original Content

Inflation may be on the rebound, and real interest rates are moving deeper into negative territory. Both have provided a big tailwind for the price of gold over the past few months.

Should you own this precious metal in a properly balanced investment portfolio? What are the benefits and drawbacks to owning gold? Click below to read our recently-published white paper, GOLD – 24 Karat Shine or Pyrite for Your Portfolio, discussing these, and other important consideration

As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.

– Nathan, Raquel, Steve, Joseph, Lori, and Jonathan

Towerpoint Wealth Team : Sacramento Financial Advisor
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24 Karat Shine or Pyrite for Your Portfolio?

By: Nathan Billigmeier, Director of Research and Analytics 

From ancient civilizations to modern society, humans have always had a fascination with gold. The yellow metal has been used as currency, as jewelry, and incorporated within various other industrial applications. Gold also helped shape United States history when it was discovered in the Sacramento Valley in 1848 sparking the California Gold Rush. But does it belong in your investment portfolio? We will discuss some of the benefits and drawbacks below. 

1) Store of Value

Famed financier J.P. Morgan once stated, “Gold is money, everything else is just credit.” This quote strikes at the core of the “gold as a store of value” argument. But what exactly is a store of value and what qualifies gold to be viewed as such? 

By definition, a store of value is an asset that maintains its value without depreciating. Gold’s ability to maintain wealth by preserving purchasing power has been well documented. Civilizations throughout history have turned to gold as a means of exchange as well as a hedge against currency devaluation. 

Gold’s finite supply also helps boost its appeal as a store of value. To date, all the gold mined throughout history would fit into two and a half Olympic-sized swimming pools. According to the US Geological Survey (USGS), approximately 187,000 metric tons of gold has been mined in total, with 57,000 metric tons remaining underground. 

Critics of gold state that it is an antiquated means of exchange with little utility or industrial application, outside of jewelry, and should therefore not be considered a store of value. Specific to utility, their argument could be viewed as valid. But what gold lacks in utility, it makes up for in investor psychology. Humans have long placed value in gold. While this value may very well be due to its historical reputation, until this connection is broken, gold will remain one of the primary assets used to preserve wealth 

2) Low Correlation to Other Investments

One key aspect of a properly diversified portfolio is owning investments that have a low correlation to each other. What does this mean, and why is it important? Correlation is a numeric value from -1 to +1. The closer that two different investments are to having a +1 correlation, the higher the likelihood their respective market values will move in tandem with each another. Vice versa is true for investments with a -1 correlation. Investments with a correlation of 0 are completely unrelated, meaning the price movement of one has no relation to the price movement of the other.For longer-term investors, it is important to have the correlation between the various asset classes (read: stocks, bonds, alternatives, cash, etc.) held in their portfolio be as close to zero as possible. This allows investors to better manage the risk of their portfolio and increases the likelihood that the share price of investments held in different asset classes will not move in the same direction in response to current economic and market trends. 

Gold is a unique asset in that it has a low, or sometimes even negative correlation to the other primary asset classes typically included in a properly diversified portfolio. In fact, as you can see from the above graph, it tends to have a negative correlation to US equities, hence sometimes being described as a “flight to quality” asset. 

3)Portfolio Insurance

Just as you purchase home or auto insurance to protect your assets against unforeseen events, you should consider doing the same with your investment portfolio. As recent events have shown us, market and economic crises can and do happen. 

Given its negative correlation to US equities, gold can provide needed insulation to your portfolio, helping it to better absorb these inevitable pullbacks. While it will not completely offset equity losses, gold can help reduce volatility and provide “downside insulation” to a portfolio. 

As the chart below shows, with the exception of two instances, the 1997 Asian financial crisis and 2013’s “Taper Tantrum,” gold has achieved positive returns during times of equity unrest. It also has a tendency to outperform US Treasuries during these downturns, which many view as another safe haven asset. 

4) But What About Income? 

Gold is not without its faults. One of the main arguments against gold ownership is the lack of a dividend or interest payment and the fact it has little to no industrial production value. 

One of the most famous investors in the world, Warren Buffet, is an outspoken critic of gold ownership for these very reasons. He has been quoted as saying, 

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” 

…and Mr. Buffett would be correct. Gold has little to no real economic utility, does not generate sustainable cash flow, and does not pay a dividend. 

What it does offer is relative stability and the potential for price appreciation. During turbulent economic times when company cash flows decline and dividends are cut or reduced, gold tends to shine, as investors try to preserve capital and fear the inevitable stimulus measures taken by central banks and/or government could stoke inflation and decrease the purchasing power of their currency.

More recently, financial markets have also been grappling with historically low interest rates, with some countries even experimenting with negative interest rates (i.e. investors paying the government interest, instead of receiving it, when owning government-issued bonds). This has significantly lowered the opportunity cost of owning gold (which pays no interest) versus owning government-issued bonds (which pay interest) as investors look for safety during times of market unease. Gold has been a direct beneficiary as the declining interest rate trend has gained steam, particularly in countries issuing bonds with negative interest rates. Why would an investor choose to pay interest to own a government bond when they could own gold instead, achieving the similar end goal of capital preservation? 

4) What happened to gold with the COVID-19

COVID-19 market pullback in March of 2020, gold suffered sizable declines along with equities. In fact, it suffered its largest weekly decline since 1983 while equities dipped into bear market territory in a record-shattering 20 days. Doesn’t this fly in the face of all the previous arguments for owning gold?

It depends on what you believe. Some have argued that the declines in the price of gold, at the exact same time equities were dropping precipitously, debunks the theory that gold should be viewed as a safe haven asset during times of market turmoil. Especially coupled with the fact that US Treasury bonds and the US dollar remained strong throughout the collapse in equity prices.

Proponents of gold have argued that the price decline the metal suffered in March, 2020 was due to the rapid shock the US economy experienced as virtually all of us entered lockdown. This forced many investors to raise cash as rapidly as possible, and gold, being a very liquid asset, provided easy access to needed cash. These proponents would challenge that the price of gold acted similarly during the 2008/2009 financial crisis before ultimately touching all-time highs, not too different to what has happened over the last three months. 

By analyzing the above chart, we are able to see that initially gold did maintain its strength as equities began to move lower. As the equity losses accelerated, gold prices declined before beginning a steady march higher prior to the March 23 low in equity prices. This does lend credence to the claim by gold “bulls” that the metal was used as a source of cash by investors during the selloff, and in doing so, helped them limit their losses.

In Summary

While critics may remain unconvinced, it is hard to deny that gold has maintained its luster throughout history as a go-to asset during times of uncertainty. Its ability to provide ballast to a portfolio allows your longer-term financial goals to remain upright and on course. We are by no means advocating that investors transition 100% of their assets into gold. However, we feel that a modest allocation of 3-7% in gold does have a place in a properly diversified investment portfolio. 

How Can We Help? 

At Towerpoint Wealth, we are a legal fiduciary to you, and embrace the professional obligation we have to work in your best interests 100% of the time. If you would like to discuss your circumstances further, we encourage you to call (916-405-9170) or email ( to open an objective dialogue. 

Sacramento Wealth Management Nathan Billigmeier Director of Research and Analytics

Nathan Billigmeier Director of Research and Analytics 

Towerpoint Wealth, LLC is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth, LLC unless a client service agreement is in place