If you're prone to panic selling, trim your portfolio a bit now instead, Odean says.

During the euphoric 1999 market bubble, behavioral finance professor Terrance Odean — standout grad student of Nobel-winning psychologist Daniel Kahneman — urged overconfident investors not confuse brains with a bull market.

Today, Odean’s message to nervous investors, fretting that the eight-year bull will soon collapse: Don’t be a market timer — most individual investors are bad at it, he told ThinkAdvisor, in an interview.

Investors typically fail at market timing because they exit too late and, likewise, re-enter too late, Odean says. Rather, clients should now be huddling with their financial advisors to structure a plan for if and when the market drops precipitously.

Odean, who teaches finance at the Haas School of Business of the University of California, Berkeley, made waves with groundbreaking research showing that investors sell winners — wrongly, except in December for tax-motivated selling — and, wrongly, hold on to losers. Selling for a gain makes people feel good, he notes. Selling for a loss prompts feelings of regret.

Other Odean research, conducted with Professor Brad M. Barber, found that men trade more than women, thereby hurting the former’s returns. Women were “less bad” at investing than men because men think they know more about investing than they actually do, his study titled “Boys Will Be Boys” showed.

Odean, 66, is now researching cognitive decline in older investors as well as the lack of women in financial-industry jobs such as money manager, analyst, mutual fund manager and financial advisor, though, he says, the gender gap is narrower for FAs than for the other categories.

ThinkAdvisor recently spoke with Odean, a laudatory reference for whom Kahneman sat penning while waiting to learn if he’d won a 2002 Nobel, Michael Lewis writes in “The Undoing Project.” As a Ph.D. candidate, Odean co-owned a Pacific Stock Exchange seat and flirted with becoming an options trader. But “the thought of spending years standing in a crowd of shouting people didn’t appeal to me,” he allowed, in an earlier interview with this reporter.  Here are excerpts from our most recent conversation:

THINKADVISOR: Is there a basis in reality for investors to feel anxious about an impending market cash?

TERRANCE ODEAN: There’s some potential for disruption. The probability of the unexpected seems higher than it had with the previous administration. So it doesn’t seem out of the question that President Trump would do something that will scare markets.

So what should investors be constructively focused on?

How will the decisions that are made, erratic as they might be, affect the ability of U.S. and international companies to continue to earn profits, and how will these decisions affect the overall American economy?

How can investors who are frightened protect their investments right now?

If the markets do take a big dive and will cause you a lot of anxiety, and make you want to sell, it’s better to trim your portfolio back now. You never want to be making dramatic moves, in either direction, when you’re feeling scared. People are better off trying to keep strong, intense emotions out of their investment decisions.

Alternatively, what could they do with their portfolio?

If an investor feels that the market is oversold or that the potential for something really bad happening is high, they could consider changing their asset allocation but not make big shifts.

But since it’s been such a long bull market — and a record-setting one — some experts say we’re indeed cruising for a bruising. Therefore, many investors are considering getting out now.

It’s possible to be somewhat successful with market timing. But what I’ve seen is that, by and large, when individual investors engage in market timing, they get things wrong. They tend to get out too late and get back in too late. It would be excessive to completely get out of U.S. stocks right now. An investor who thinks that something will rattle the market could scale back their equity holdings.

But what about those who feel their best bet is to go to cash?

Though there’s a lot of uncertainty and the market is at a high level compared to the past, that doesn’t mean it can’t continue to go up. If you go completely to cash, the risk you’re taking is that the market will continue to do well while you sit on the sidelines. In 2009, a lot of people who sold were in cash when the market was doing well again. So most investors who are thinking of going completely to cash shouldn’t. Plot your investment strategy in times when you aren’t feeling strong emotions. Ease back when you’re not panicked.

How can financial advisors best serve their clients now? Should they be proactive and phone them?

It’s better to talk to clients before there’s a crisis than to start to deal with them when we’re in one. It’s much better to let them know what your advice will be if there’s a crisis. For one thing, it can add credibility. Advisors can be very helpful in encouraging clients to get perspective and plan ahead for a portfolio they can live with if the markets get rocky.

The market has been going up largely because of President Donald Trump’s plans to repeal and replace the Affordable Care Act, cut taxes and decrease regulation. Should investors hedge for the possibility that some of that won’t happen soon?

Investors should always hedge. That’s part of the reason you don’t put all your money in stocks unless you’re very young. You can hedge by diversifying across asset classes, which would include international stocks as well as a diversified bond portfolio.

In times like these, prudence and good decision-making are critical. But older investors suffering cognitive decline have impaired financial decision-making ability. You’re conducting research in this area. Please discuss.

By age 85 or so, about two-thirds of people have some cognitive decline in their ability to make decisions about their finances. Some people are as sharp as can be when they’re in their 90s or even early 100s, but most aren’t. At the same time, confidence in one’s ability to make financial decisions decreases more slowly than does cognitive capacity. In some cases, people’s confidence level doesn’t drop at all.

That combination could spell disaster. What can be done as a preventative?

When people are around 65 or even 70, they should start creating a plan for how they’re going to avoid making bad decisions when they get older should they go into decline. They can arrange with a fiduciary, like a financial advisor, to review all their future major financial decisions or have a co-signer for such [transactions.].

Why is diminished financial cognitive capacity a more significant and widespread issue nowadays?

One reason is because we’ve switched form defined-benefit to defined-contribution pensions. With a defined-benefit pension, if you’re 85 and make a really bad financial decision, about the worst you can do is lose the money in your bank account. But with a defined-contribution pension, you can lose all your future income.

Many older people are vulnerable to financial scams. Tricking the elderly out of money has become a huge problem. You’re researching this as well. What precautions can be taken so that older people aren’t taken?

They have to start thinking ahead as to how they’ll protect themselves. They need to set up some sort of checks and balances; for example, a co-signer or someone to approve decisions above a certain dollar amount. A responsible adult child or a financial advisor could handle that role.

Are there any services that would be helpful?

I expect that we’ll start to see more solutions offered. Technology can be of some use. For instance, you could have your bank account monitored for charges that look [suspicious]. Right now banks aren’t filtering for that. But they could be. Credit card companies do it all the time: If there’s a charge that looks a little odd, they’ll freeze it until you phone to [confirm it was you who incurred the charge]. If you’re 85 years old and have suddenly wired $1,000 to, say, Nigeria, that would appear that there’s something wrong.   

Seems that attitudes need to be changed so there’s no stigma to older people’s receiving help in making financial decisions.

If they can give up some control over their financial decision-making and entrust it to a fiduciary without feeling that it’s shameful, it will make a change of social mores easier. People will feel it’s simply the right and responsible thing to do. 

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