Current market environment performance of dynamic, risk-managed investment solutions.
By David Wismer
The message from a recent book will sound familiar to regular readers of our weekly updates, which often discuss the benefits of risk-mitigating portfolio strategies for investors.
I have long been a listener of Barry Ritholtz’s Bloomberg radio podcast “Masters in Business.” Ritholtz interviews prominent—and occasionally offbeat—figures from the fields of finance, business, journalism, and academia.
Ritholtz, an author and investment strategist, recently wrote a bestselling finance book “How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth―and How to Avoid Them.” He writes in the preface of the book,
“This book is designed to reduce mistakes—your mistakes—with money. Tiny errors, epic fails, and everything in between. If only you could learn how to avoid the avoidable errors investors make all the time, your life would be so much richer and less stressful! … “Most finance authors don’t take this approach. The typical investing book goes the ‘How-To’ route. They want to teach you—in a dozen chapters or so—everything you need to learn to become financially successful. Execute these 100 strategies, and start adding up the dollars! “That approach fails in the real world. Even if you do all the right things, it only takes a few mistakes to undo all your prior efforts. “This truth is counterintuitive: Avoiding errors is more important than scoring wins. … “More simply stated: Make fewer errors, make more money.”
“This book is designed to reduce mistakes—your mistakes—with money. Tiny errors, epic fails, and everything in between. If only you could learn how to avoid the avoidable errors investors make all the time, your life would be so much richer and less stressful! …
“Most finance authors don’t take this approach. The typical investing book goes the ‘How-To’ route. They want to teach you—in a dozen chapters or so—everything you need to learn to become financially successful. Execute these 100 strategies, and start adding up the dollars!
“That approach fails in the real world. Even if you do all the right things, it only takes a few mistakes to undo all your prior efforts.
“This truth is counterintuitive: Avoiding errors is more important than scoring wins. …
“More simply stated: Make fewer errors, make more money.”
Behavioral bias isn’t limited to retail investors
Some time ago, I wrote about the growing prominence of behavioral finance theory in the investment world and explored some common behavioral biases among self-directed investors. But what about financial advisers and other investment professionals? Are they similarly affected by biases?
Proactive Advisor Magazine has interviewed many financial advisers across the U.S. who subscribe to a disciplined approach to financial and investment planning for their clients. Yet many have discussed making past mistakes in investment judgment, process, or implementation. Research studies document that almost every textbook example of behavioral finance bias or emotional decision-making can be ascribed to financial advisers and other industry professionals at some point in their careers.
An article from the CFA Institute (home of the Chartered Financial Analyst credential) noted,
“Heuristics—mental shortcuts—and other biases continue to affect some of our professional choices, leading us to make mistakes. For a gifted few in the industry, biases are a source of alpha. But for many others biases impose a cost—a price paid for irrationalities. “Financial markets reflect these irrationalities and collective biases.”
“Heuristics—mental shortcuts—and other biases continue to affect some of our professional choices, leading us to make mistakes. For a gifted few in the industry, biases are a source of alpha. But for many others biases impose a cost—a price paid for irrationalities.
“Financial markets reflect these irrationalities and collective biases.”
Three of these behavioral biases stand out from our discussions with financial advisers:
1. Trend-chasing bias. Today’s financial advisers have access to institutional-type strategies built with sophisticated algorithmic models by third-party investment managers such as Flexible Plan Investments (FPI). In and of itself, that is a real plus for their clients. But advisers must still make fundamental portfolio allocation decisions—and sometimes they may “chase” the best-performing strategies from the previous quarter or year.
A senior manager at FPI explained,
“One experience advisers may have had is choosing to use a back-tested strategy for client portfolios after it had a good and long run upward. We often watch strategies do well and then attract a large amount of assets due to their recent success. There is nothing inherently wrong with that. However, such strategies then might experience a period of sideways or drawdown performance. That normal, yet less-than-stellar, performance leads performance-chasing advisers (or their clients) to quit the strategy before the next period of positive performance.”
A diversified portfolio of several different actively managed strategies that are not highly correlated, he added, can offer clients higher probabilities of success over the long term and throughout bull and bear market cycles.
2. Familiarity bias. Like retail investors, some financial advisers tend to stick with what they know. FPI offers strategies that encompass a wide range of asset classes, geographies, and investment styles (for example, mean-reverting versus trend-following, or even inverse to an index). It’s important for advisers to stay informed about new strategies, evaluate their pros and cons for their clients, and consider how each one might fit within a dynamic, risk-managed portfolio.
3. Herd mentality. This can manifest itself in different ways for financial advisers, most often prompted or reinforced by the behavior of their clients or their peers. In markets like that seen since April 2025, clients tend to become more return-oriented in their expectations as the market continues (until quite recently) to make new high after new high.
Although these same clients may have explicitly agreed to an investment plan that was well-aligned with their risk profile and incorporated several strong elements of risk management, their devotion to a disciplined approach may start to waver in the face of a rising (or plunging) market. Advisers must consistently reinforce the long-term value of an actively managed approach designed to mitigate risk when markets inevitably turn or become volatile.
The CFA Institute once surveyed its professional readership to identify the behavioral bias that “affected their investment decisions the most.”
Many experts agree that these types of biases are often most pronounced at market extremes. Investors of all types tend to take on too much risk in elevated markets and make poor decisions in volatile or declining ones. Nobel Prize–winner Richard Thaler has said, “Investors make mistakes—and they make mistakes because they are human.”
The good news is that the quantitative strategies offered by Flexible Plan Investments can help remove emotion from investment decisions for both financial advisers and their clients. These strategies are designed to perform competitively in bull markets and to manage risk in volatile periods—responding to market conditions through full market cycles.
As the manager previously cited points out, FPI’s business consultants are always available to discuss portfolio construction or performance-related issues with advisers, who can then share those insights with clients.
For those seeking additional perspective, I suggest taking a moment to read the in-depth interview with Jerry Wagner in The Wealth Advisor that explores FPI’s differentiated approach to active investment management, innovation, and personalized support.
I also recommend an article by a behavioral finance expert and industry veteran, Richard Lehman, who explains why “The case for active over passive investing is really about investor behavior.”