Welcome to Fix-It Friday, the podcast segment that simplifies financial strategies to help you make smarter decisions. Hosted by Jonathan Blau, CEO of Fusion Family Wealth. Each episode dives into common biases that impact our financial choices—and how to fix them. This week, Jonathan discussed the concept of ambiguity bias and its impact on financial decision-making. He explores how this cognitive bias can lead investors to make suboptimal choices by favoring more certain but potentially lower-returning investments.

IN THIS EPISODE:

• [00:00] Introduction to ambiguity bias and its paradoxical effect on wealth management
• [00:51] Jonathan introduces ambiguity bias and its paradoxical effect on wealth management
• [02:56] Explanation of risk vs. ambiguity in investing, using S&P 500 data
• [03:57] Historical returns comparison between stocks and bonds over the past century
• [06:31] Real-life examples of ambiguity bias affecting investment decisions
• [08:32] Strategies to combat ambiguity bias and make better long-term financial choices

KEY TAKEAWAYS:

• Ambiguity bias drives investors towards choices with more certain cash flows, potentially increasing the risk of failing to meet long-term financial goals.
• Over extended time horizons, stocks have historically outperformed bonds, with higher probabilities of positive returns.
• Focusing on total returns (dividends plus growth) rather than just dividend yield can lead to better long-term investment outcomes.
• Combating ambiguity bias requires considering trade-offs between short-term certainty and long-term financial success.
• Investors should focus on risk and return probabilities rather than seeking to avoid ambiguity, emphasizing a long-term perspective in investing.

ABOUT THE HOST: Jonathan Blau is the President and CEO of Fusion Family Wealth, founded in 2013 to focus on behavioral finance and guide clients toward rational financial decisions. A sought-after speaker in wealth management, Jonathan previously held senior roles in tax and estate planning at Arthur Andersen. He has a BS in Finance, an MS in Taxation, and an MBA in Accounting. Based on Long Island, Jonathan is active in the local business community, supports causes like the Middle Market Alliance and Sunrise Day Camp, and enjoys boating with his family.

RESOURCE LINKS 

Fusion Family Wealth - Website

Jonathan Blau - LinkedIn

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https://www.fusionfamilywealth.com/disclosures

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com.

Jonathan Blau: Hello everybody. Welcome to another episode of Fix It Friday. We're recording this one. Uh, just about week and a half or so before the end of summer, and it went by quickly.

Welcome to The Crazy Wealthy Podcast with your host, Jonathan Blau. Whether you're just starting out or an experienced investor, join [00:00:45] Jonathan as he seeks to illuminate and demystify the complexities of making consistently rational financial decisions under conditions of uncertainty. He'll chat with professionals from the advice world, entrepreneurs, executives, and more [00:01:00] to share fresh perspectives on making sound decisions that maximize your wealth.

And now here's your host.

And more certainty, uh, with regard to, uh, the level of fluctuation we can expect from them. Uh, we are attracted to those types of investments. So a good example of that is bonds we're attracted to bonds because in [00:01:45] general, bonds pay interest periodically, usually every six months. And, uh, there's not. Too much ambiguity.

And there's a comfort level just knowing that, um, we, we are gonna get that [00:02:15] money. Uh, and, and we, so a lot of people. Will bias their investments toward things like bonds, uh, to be because of the ambiguity bias. So the paradox of wealth management. Is that when it comes to ambiguity [00:02:30] bias, the more we emphasize certainty as it relates to the need for certainty and the cash flows and the returns we get, the more we increase the probability that we'll fail to meet our long-term financial goals.

And when you go to three year and five year, uh, rolling periods, you have 85% that were positive [00:03:30] for three years and almost 90% for five year periods. So when we look at the risk of investing in stocks once we extend the time horizon past a year, the odds of succeeding, uh, grow. Very close to [00:03:45] 90% in five years and close to, um, 95% in 10 years.

Right to those companies that are in the s and p 500, the after inflation returns for the last a hundred years have been 3%. So 7% after inflation for stocks, 3% after inflation for [00:04:30] bonds. And so we ask ourselves, knowing that long history, why would rational investors choose to have any meaningful portion of the money, uh, that they invest in, in the investment class bonds that earns fully, uh, less than [00:04:45] half.

Uh, one year in five or six. Uh, but, but we can't know with certainty in the short run when those declines will happen. So for [00:05:15] example, during COV, when the, uh, economy shut down, the market declined 34% from February, 2020 to March of 2020. So in one month we had an unprecedented 34% decline. There's nowhere, uh, [00:05:30] that we can look for guidance to have.

And we're investing, we're investing for the long term. So. [00:06:00] What does one to do to fight, uh, the, the, um, the ambiguity bias that we have, uh, and prevent it from causing us to make very poor, long-term financial decisions. Uh, so what we really need to do is look at, uh, look at our needs, look at the [00:06:15] risk and return expectations involved as opposed to.

So let's take a look at a real life example. A lot of, uh, retirees. Uh, who, who are revisiting their investment plan, [00:06:45] like to make sure that the stocks that they own have higher dividends than lower dividends, because there's less ambiguity involved. If you're starting off with a stock, let's say, with a 4% dividend cash flow, then with a stock with a 1% dividend cash flow, [00:07:00] in your mind you're saying, well, I'm getting four times the cash flow.

And the reason is, is generally because that company who's paying the higher dividend. Is not [00:07:30] growing their company or their business as fast as the other companies. So the CEOs of that company, the people in charge of making sure they maximize shareholder value, uh, say, gee, I'm, I'm just gonna pay out more of my cashflow in the form of [00:07:45] dividends.

But when you think about it realistically, you actually wanna own the companies that are growing fast enough. To warrant investing and reinvesting the money in the company's growth because that growth is gonna be so [00:08:15] far superior to the company who isn't growing. That the total return, the, the lower dividend plus the higher growth, is gonna lead to a higher financial and a better financial outcome.

Uh, versus investing for our financial needs, the needs to maximize our ability to have the, uh, income we need in [00:09:00] retirement and leave the legacy, uh, behind. So we need to decide on which end of our financial life we are willing to have more uncertainty so that we may have more certainty on the other end.

And, and that's the trade off for choosing less ambiguous [00:09:45] investments that are also likely lower returning investments, uh, in, in, in the short run. And so, uh, just be aware of the ambiguity bias. Focus more on risk and return where there are probabilities. Recognize that, [00:10:00] uh, as a long-term investor. You can calculate the probabilities and determine whether or not that's appropriate for you.

Less ambiguous investments that will, [00:10:30] that will lead to a, a, a very low probability of me hitting the financial goals that are so important to me and my family. I hope you, you enjoyed this episode of, uh, fix It Friday and that, uh, learning how to identify and [00:10:45] not succumb to the ambiguity bias will help everybody make better investment decisions.

Thank you for tuning into another episode of The Crazy Wealthy Podcast. For more insights, resources, and to sign up for our [00:11:15] newsletter, visit crazy wealthy podcast.com. Until then, stay crazy wealthy.

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To provide investment advisory services, a copy of Fusion's current written disclosure brochure discussing our advisory services and fees is available upon request or at www.fusionfamilywealth.com.