Anchoring Bias

Anchoring Bias: The Hidden Force Behind Many Bad Financial Decisions

One of the most dangerous investing mistakes isn’t a lack of intelligence, information, or experience.

It’s something far more subtle.

It’s called anchoring bias, and it affects everyone from first-time investors to seasoned professionals.

Anchoring bias occurs when we place too much importance on the first piece of information we receive and allow it to influence future decisions—even when that information may no longer be relevant.

In investing and financial planning, anchoring bias can quietly sabotage your wealth-building efforts.

The Investor Who Can’t Let Go

Imagine an investor who bought a stock at $100 per share.

The stock falls to $70.

Instead of asking, “What is this company worth today?” the investor becomes obsessed with getting back to $100.

That original purchase price becomes an anchor.

The problem?

The market doesn’t care what you paid.

The stock may deserve to be worth $50. It may deserve to be worth $150. Your purchase price is irrelevant to its future value.

Yet many investors refuse to sell because they are anchored to a number from the past.

The House You Refuse to Sell

Anchoring bias doesn’t stop with investments.

Homeowners often become emotionally attached to the value they believe their home is worth.

Maybe a neighbor sold their house for $600,000 two years ago.

Now the market suggests the value is closer to $525,000.

Rather than accept reality, many sellers leave their homes on the market for months because they remain anchored to a previous valuation.

The market sets prices—not our memories.

Retirement Planning Anchors

Retirement planning is full of anchors.

People anchor to:

• Historical tax rates

• Previous spending habits

• Old Social Security rules

• Prior market returns

• The salary they once earned

One of the biggest mistakes I see is retirees anchoring their expectations to the extraordinary market returns of the past decade.

The S&P 500 delivered exceptional performance driven by low interest rates, massive liquidity injections, technological innovation, and strong corporate earnings.

Many investors now assume those returns are normal.

History suggests they are not.

When expectations become anchored to an unusually favorable environment, disappointment often follows.

Why Anchoring Is So Dangerous

Anchoring feels logical because it gives us certainty.

Humans crave reference points.

The problem is that financial markets are constantly changing.

Interest rates change.

Tax laws change.

Technology changes.

Demographics change.

Economic policies change.

What worked five years ago may not work today.

Successful investors continually reassess reality rather than remain attached to outdated assumptions.

The Federal Reserve and Anchoring

Even policymakers are susceptible.

Markets often become anchored to Federal Reserve actions.

For years, investors were conditioned to believe that every market decline would be met with lower interest rates and additional liquidity.

This became known as the “Fed Put.”

When inflation surged in 2022, many investors remained anchored to the idea that the Federal Reserve would quickly rescue markets.

Instead, the Fed embarked on one of the fastest rate-hiking cycles in history.

Those who failed to adapt paid a steep price.

How To Avoid Anchoring Bias

The first step is recognizing it exists.

Ask yourself:

• If I didn’t own this investment today, would I buy it?

• Am I holding this asset because of its future prospects or because of my purchase price?

• Am I making decisions based on current facts or outdated information?

• Have market conditions changed enough to require a new approach?

Good financial planning requires flexibility.

The best investors aren’t necessarily the smartest.

They’re often the most adaptable.

The Most Important Number

Many investors spend years focused on numbers that don’t matter:

• What they paid for a stock

• What their home was worth during the housing boom

• The highest value their portfolio ever reached

These numbers are anchors.

The most important number is not what something was worth yesterday.

It’s what it’s worth today—and what it may be worth tomorrow.

Financial success often comes down to seeing reality as it is, not as we wish it were.

Anchoring bias keeps us looking backward.

Wealth creation requires looking forward.

The market does not care where you bought.

The economy does not care what happened last year.

And your financial future won’t be determined by old reference points.

The investors who build lasting wealth are those willing to challenge their assumptions, update their beliefs, and adapt to changing circumstances.

Don’t let yesterday’s numbers dictate tomorrow’s opportunities.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Colin Symons, CIO Lloyd Financial Group

What happened with the Fed was worth talking about, which is why I wrote an unusually long post about it, yesterday. My belief is that the bond market is over-focused on a grim dot plot, despite Warsh saying that’s a relic of the past and didn’t even fill one out. Warsh is trying to bring change, and the market is currently stuck in the past.

While it’s possible we get a rate hike or more, the Fed is no longer focusing on stale data and instead looking at market data for direction, like a serious investment manager would. Given that, and the fact that oil is down over 30% from the May peak and market-derived inflation expectations have been on the decline, I think market expectations of rate hike magnitude are unlikely to be correct.

Another big item last week was Iran and the US reaching a Memorandum of Understanding (MOU) to cease fighting. Despite the usual final potshots and grumbling on both sides, thus far this ceasefire has held, with Iran citing great progress. I think we managed this well at Lloyd Financial by doing exactly the sort of thing Warsh is trying to get the Fed to do.

What do I mean? If you’ve been following me for a while, you should know that I focus on market data over a narrative. The narrative over Iran has been all over the place, and it would be easy to seize onto a narrative and hod on. Instead, we looked at data and stayed pretty calm. As often happens, oil priced in a worst-case scenario quickly and never got back there.

Rates have been a bigger problem, as the effect of elevated oil can be sticky, as it can flow through goods prices. Thus, the market went from pricing in two rate cuts at the start of the year to pricing in two hikes. That’s a real break on growth stocks that expect a lot of earnings farther in the future, as high rates devalue those earnings.

However, liquidity has stayed strong, whether you look at cross-border flows or yield spreads. There’s still plenty of money out there and lots of appetite for taking risk. It’s just a question of where those funds would go. Thus far, the answer has been a focus on semiconductors and memory, as their growth prospects are viewed as indefatigable, regardless of what rates do.

Lastly, we had the hotly anticipated SpaceX (SPCX) IPO. We had the usual handwringing over valuation, along with a rocketship-like initial performance before falling a bit closer to earth. Is the dream over? Perhaps not. Total market indexes are adding it today, Russell indexes add it on Friday, MSCI indexes next Monday, and QQQ around July 7th. That’s a lot of systematic demand.

No doubt, the SPCX is very expensive, but a bull can claim that space has enormous potential. Float, the percentage of capitalization that actually trades, is small. Combine the story with the low float, and the potential is there for a volatile squeeze up. That doesn’t have to happen, but it wouldn’t shock me if SPCX briefly became the most valuable company in the world if the squeeze plays out.

All three of these things are related. Liquidity is ample and hasn’t faded despite oil and rate fears. This has helped keep that bid in the market that seems to have frustrated so many. That liquidity has also allowed SPCX to act like a rocketship. To me, rates are the final frontier of stress. I don’t think the market is considering the change at the Fed and is wrong-footed. As we get more Fed communication over coming months, my hope is Fed fears can fade and the last market restraint will lift. As always, we’ll see what happens.

Rates have unwound yesterday’s move up, after printing new highs on the front-end amid rate hike worries.

Korea’s semi-heavy Kospi index fell -10% overnight as chip stocks fell heavily on what looks at least partially like a mechanical unwind from leveraged ETFs. This has translated into selling here, with the SMH semiconductor index -5%. To be fair, that gets us all the way down to levels not seen since... last Wednesday.

GOOG was -5% yesterday, as a major AI researcher left to join Anthropic. In general, yesterday saw heavy selling in Mag7 names.

ADP Weekly jobs and S&P PMI today. There’s also a 2Y T auction that I wouldn’t normally mention but is worth looking at considering all the recent rate stress.

Bottom line: How much will the leverage unwind in Korean semis hit US markets?

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

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This content is intended to provide general information about Lloyd Financial. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable

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