Investing Sense with Dr. Wei Hu – Reference Points

Everyday Wealth

Jean Chatzky

Investing, Business, Education

2 • 935 Ratings

🗓️ 25 August 2022

⏱️ 10 minutes

🔗️ Recording | iTunes | RSS

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Summary

In our monthly segment, Investing Sense, Dr. Wei Hu, vice president of financial research for Edelman Financial Engines, joins Jean and wealth planner Andy Smith to discuss how reference points can lead to bad investing decisions and what to do to help prevent that from happening.

Dollar Cost Averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchase shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low-price levels.

An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.

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Transcript

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0:00.0	This is Everyday Well, this is Everyday Wealth, with award-winning journalist Soledad O'Brien and
0:09.6	Personal Finance Expert Jean Chatsky.
0:12.4	Last month, we started a segment called Investing Sense, which I love, where we focus on investing behavior.
0:21.0	Some traps that we might fall into.
0:24.0	Our guest this month is Dr. Wei Hu, Vice President of Financial Research for Edelman
0:29.3	Financial Engines.
0:31.0	Wei, welcome back to the show.
0:32.2	Always great to have you here as well.
0:34.1	Thanks, Jean.
0:34.7	Great to be back with you again.
0:36.3	Last week, we talked about continuing to invest money,
0:41.1	even in a bear market, and how some people are saying that stocks are
0:46.1	on sale right now is that true? So what we have here is good advice that is stay investing if that's part of your
0:54.3	financial plan but it's couched in a little bit of an oversimplified thinking about
0:59.4	the markets the whole notion of stocks being on sale is actually evidence of a behavioral bias called
1:06.8	reference points.
1:08.3	What is that exactly?
1:09.3	Yeah, the basic idea of reference points is that we set mental benchmarks for what the market price has been or what it should be.
1:18.0	For example, if you think about the market being down since January 1st, then you might think stocks look cheap.
1:25.0	But if you change your reference point and say, why not make it five years ago?
1:30.0	Then relative to five years ago, you could say that stocks look expensive.
1:34.8	So the whole notion of reference points, depending on how you choose a reference point,
	...

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