What's Really Driving Your Portfolio Decisions?

MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.

As I record this, North America is hosting the World Cup for soccer. People who, a few months ago, didn't know a corner kick from a back heel pass are suddenly debating who's better, Ronaldo or Messi, or Argentina or France. And my personal favorite, the many, many reasons why the offsides rule needs to be fixed. The World Cup is a showcase for the elites of the sport, but they didn't get here by luck. They got here by perfecting the fundamental skills of the game. Dribbling, passing, shielding.

They trapped or collected thousands of passes. They made hundreds of penalty kicks. They developed their situational awareness. They practiced set plays to take advantage of particular circumstances in a game. And they drilled until every player knew exactly what to do and when to do it. In other words, they focused on the basics, the fundamentals of the game. And they did that because if you can't get the fundamentals right, it's hard to win.

What does all the soccer talk have to do with your financial life? Well, today's episode is about portfolios, and to improve your portfolio, it's important to focus on the basics of investing. Before I continue, let me say upfront that we're not going to talk in detail about choosing particular investments. No, we're focusing on the fundamentals of portfolio construction and the biases that can prevent us from making good decisions for our holdings. Here's a simple example.

One way to build a soccer team is to just find the best players and send them out onto the field. The focus is 100% on the individual players, but that rarely works in team sports. Yes, you need good players, but they also have to be able to work together. When it comes to investing, we as individuals often focus on the details of the individual stocks, bonds, and ETFs that we own. But when we do that, we can be blinded to the portfolio as a whole. When we just look at pieces of the puzzle, that's called narrow framing.

And when the frame is too narrow, then it can prevent us from choosing wisely. Narrow frames can be useful, but it's important to zoom out and look at the portfolio overall. On that note, my guest today is Kasey McCurdy. He's our chief portfolio strategist with Schwab Wealth Advisory. He focuses on investment management philosophy, asset allocation frameworks, and portfolio construction standards, among other things. He has an MBA and is a Chartered Financial Analyst®.

Kasey McCurdy, welcome to the show.

KASEY MCCURDY: Thanks for having me, Mark.

MARK: I assume you are a long-time listener and first-time caller. Would that be a fair description?

KASEY: Absolutely. 22 years.

MARK: OK, let's go. Let's dive right in here. One of the tricky things about portfolio management is that, at some sense, we all know that we should be, you know, kind of taking action. Portfolio management, there's an active component to that. And it feels better, I think, in a lot of ways to take action versus do nothing. How do you think about, when you're managing a long-term portfolio, how should investors distinguish between when it makes sense to take action versus, hey, now's the time just to lie low. No reason to dive in just yet.

KASEY: The number one question that I feel like I field is, should I be taking action? The challenge that I often see is investors are confusing that action with progress. And so I'm always trying to help our clients understand that a good portfolio process is a much more important part of your plan than really just taking action at any moment. So the way that I think about this is it's really about what has changed in a client's life more so than a headline that is driving the decision.

So thinking about the goals the client has invested in their plan, thinking about the time horizon that they're focused on, the cash-flow needs, you know, their risk capacity, and taxes is often one that comes up. It goes on and on, but the idea there is that it's a lot of things that are focused on the individual rather than the market or the portfolio. I would frame it mostly, as you mentioned, action. Action, I feel like, is something that has a purpose or a reason. Meanwhile, activity tends to be more feelings-based. It's a reaction due to an emotional change.

MARK: Given that emotion, it's interesting that you mentioned that because you're a former portfolio manager, and not surprisingly, you spent a lot of time in that role looking at spreadsheets, analyzing data. And as you just pointed out, the reality is for most individual investors, oftentimes decisions are made by how they feel in a particular moment. So as you've talked to individuals, what emotions tend to cause them to make portfolio changes, not when they need to, but when maybe they don't need to?

KASEY: Emotion is a big one. And as you noted, I have a history as a portfolio manager, and that was probably the biggest thing that we were always trying to think about and make sure it wasn't creeping into our process. I'll highlight some of the big ones that we hear. I think there's usually about four that I hear most often. The first one is fear. The second one is regret. The third emotion is envy. And the last one is control.

So fear is all about trying to stop the bleeding and wanting to halt the losses in a portfolio and feeling like we need to sell in order to do that. The regret emotion is often focused on wishing you had owned more of something that has done really well. You can consider this the FOMO type of concern, the fear of missing out, where the other "investors" you see are owning something that is very prominent in news or performing very well. We seem to be going through that quite a bit over the last six years. The other one that I would call out is the envy aspect. It's kind of similar, but it's a little bit more along the lines of thinking that others are making money where you are not. And that is something that I, again, you know, we see this in a lot of the dynamics in markets right now. I would point to some of the more speculative areas, thinking about gambling and prediction markets and even the IPO bonanza that we seem to be going on in 2026, that all kind of lends itself to this envy emotion. The other one I call out is control. Just the concept of, if I trade, at least I'm doing something. And that can create this false sense of control. But again, it's very much emotion driven.

And I highlighted headlines before. I will constantly … I'm on a crusade to try to help people think about headlines because these days we are bombarded with so much information from social media or news outlets, and their only goal is to create engagement. And that engagement is largely about getting you to respond, getting your blood pressure higher, that creates that emotion.

The challenge is that you will get a 20-second headline. And then think about trying to make a change in a portfolio that's meant to last 20 years. That's a very challenging dynamic that I am constantly pushing back against.

MARK: I don't think we're supposed to use a lot of sports analogies, but I can't help but think about how a lot of defenses in various sports, they try to speed up the decision-making of the offense to like rush them into making a decision that they'll later regret. And I'm wondering if that is a good analogy for periods of market turbulence causing … as you listed those emotions, I was thinking, well, wait a minute, all of those would seem to rise during periods of market turbulence.

Is that going to speed up inadvertently the decision-making of people when markets getting choppy? And is that going to turn into more, as we're recording this, I think Wimbledon has been going for about three or four days, unforced errors, to use a tennis term. Do you see that sort of stuff under real-world conditions with the investors you're talking with?

KASEY: I would say, unfortunately, all the time. And I think that is a great way to think about it is you feel the speed. You feel the need to react. And again, you offer the defense, I would suggest rather than being that offense that is being pushed out of their game, I would focus on being a pilot. And you talked about turbulence, so you've flown around. I do a number of flights myself. You may experience some turbulence, but that doesn't mean that the pilot is going to change their course or their altitude. That's kind of how we're trying to help coach our clients to think about what they're seeing in markets. That should already be part of the plan. That should already have been discussed before any initial investments were made. And that's how I think about that offense that is getting caught off guard. They should have been prepared for it. That's what we want to do when we're thinking about building a plan and building a portfolio.

MARK: One thing that we've preached over the years, maybe too much and people just kind of ignore it, is the importance of rebalancing a portfolio. And the reality is I get the sense sometimes people think about it a little bit like sort of going to a dentist or eating their vegetables. It's like people kind of nod their head and "Yes, yeah, that makes sense." But do they really do it as much as they should? Probably not.

Why is that? Is there an emotional component that causes one of the simplest strategies in the world to be used less than maybe it should be?

KASEY: I like the examples that you offered. The rebalancing challenge is very easy to explain. I think people tend to understand it just like they understand going to the dentist. What's harder is the actual execution. And I think that's often because, emotionally, it's kind of backwards. You have this need to trim from the things that feel brilliant in your portfolio. The things that are working is where you would actually be reducing the allocation.

Meanwhile, you're adding to the places that are actually feeling more disappointing. And that is, in essence, what rebalancing means. And so I think that creates a real challenge for investors to fight against the actual execution. You can understand it. You can put in a plan to do it. But then actually taking the action is hard. What's interesting is that that's where the value is in rebalancing is because it's less natural. You're actually taking those profits, and you're realizing gains as you move out of the things that have been winning.

The other part of it that I will call out is if you don't implement rebalancing on a regular cadence, the challenge is that you effectively let the market dictate your risk profile. And the way that I think about this recently is this recent period of, let's call it seven years of post-COVID, we have seen an extremely strong equity market, generally speaking. And so if you had invested in 2019 in the classic portfolio of 60% equity, 40% fixed income, and not rebalanced over this time period, now you are actually sitting at something that's closer to 80% equity and 20% fixed income. And that is probably not what you would have decided back in 2019 when you had defined your plan and defined your goals and your time horizon, all of that. That's what I mean by the market dictates your risk profile when you don't rebalance.

MARK: Other than just kind of knowing about it and then just incorporating that into their normal investing practice, is there any practical ways really to set up a rebalancing regime to at least eliminate some of the stuff you were just describing.

KASEY: I'm always a fan of making our lives as easy as possible. These days we have a lot of tools to do that. After the dentist idea, a calendar-based concept is great. Set it, and you know every six months you need to go back and do it. For us, we think about the idea of having a quarterly review that's light, make sure that everything is what you have in line with what you want. A more deeper review on an annual basis is probably a good calendar structure to go with.

The other way to think about it, especially when you have very volatile markets or depending upon your portfolio, if you have positions that can move a bit more than, let's say, just an index, we have the idea of what we describe as tolerance bands. In the example I gave a moment ago, I talked about going from 60% equity to 80%. Well, you could consider a threshold there where you would want to rebalance. So oftentimes we'll say something in the ballpark of 5 to 10% is a good idea to think about bringing it back in line with what your original allocation was.

The other thing that I would keep in mind, a lot of people think rebalancing just needs to be the hard and fast transaction of selling and buying something else. You can also use cash flow to help rebalance a portfolio. If you have income that is being deposited into accounts, you can direct that towards the part of the portfolio that has underperformed. And so now you can rebalance in that way.

You can also adjust how you manage your withdrawals, where your dividends go, any maturities in bonds. Just trying to think more strategically about where to place new money or where to take money out of can help with that rebalancing and doesn't feel like you need to sell. Because the challenge with selling, particularly in some of the tax-sensitive areas, is you can run the risk of generating tax costs, and that comes into more challenges of how do I balance my tax needs versus the portfolio allocations. So method for trying to rebalance without explicitly rebalancing.

MARK: Another classic technique is diversification. Everyone thinks diversification is a good idea, but … under, I'm sure if you've experienced it in your portfolios, I certainly experienced it just in my own personal investing. You're diversified, but you see, if you're doing it right, some things are going to be doing well, some things maybe not so well at any given point in time.

And that is hard to look at that statement or look at that screen of your positions with the unrealized gains and losses. And you're just drawn to what's working right now, even when it just leads to more of a concentration as you were just describing with rebalancing. So what's going on there? Is it just pure emotion, or is it people start to rewire their brain a little bit and say, "That's doing well. I knew it, I knew it. I knew it all along that that was the thing. Now I'm going to dive in."

KASEY: That's great validation, right? I bought it, and now it's gone up.

MARK: Yeah, yeah.

KASEY: This goes back to a lot of the things that are prudent aren't exactly exciting. And diversification is a great example of that. I think, again, you can say that it is accepted generally in the investing sphere, but maybe you run the risk that not everyone is implementing it as explicitly as it probably should be used.

There's a lot of benefits. And you go back to Harry Markowitz, who often will be called the father of diversification. And he always said that there's only one free lunch in investing, and that is diversification. And the counterpart to that is concentration. And to be honest, you call it out, it's got a better story. You talk about, especially recently again, with the dominance we've seen in certain parts of the market, you own the winning stock, or you own the sector that is doing very well. That feels like justification that you are investing the way that you should be.

The other thing too that we will see is that clients get very comfortable with understanding certain investments. They've held them for a long time, they've built up a large position, and it's that familiarity that is another challenge. And this can happen a couple of ways, just because you know a company, but it also can come from your employer stock, where you work for the company, you feel like you have a lot of information on the company. And for that reason, you feel comfortable owning more than may be prudent. And again, for our purposes, when it comes to individual stock, we often call out a threshold of 10% for concentration. Anything over that tends to have a bigger impact on your portfolio than you may like. But I think that that is a couple of reasons that I would point to as to why we are always trying to help our clients move closer to a diversified portfolio.

MARK: We'll get back to my discussion with Kasey in a few moments, but now we're going to look at how we get in our own way when it comes to portfolios. There's a basic big-picture question that deserves some attention. What is it about investing that makes it such a target-rich environment for biases that make our financial lives harder?

Number one, money is emotional. It's rarely just about the math. It's about our deepest needs. Money represents security, success, and comfort. It also encompasses our darkest fears like failure or inadequacy.

The second reason that emotions come into play is that data is hard to come by to help regulate our emotions. For example, even a simple question like "How am I doing as an investor?" can be hard to answer. Before I dive into this a little more, go back to where we started the episode with the World Cup and soccer. There is a ton of analysis on every player and how they've performed in every conceivable situation. That's hard to come by for the individual investor. As a result, most of us aren't good at evaluating our own investing performance.

If we rely just on our memory, it's too easy to cherry pick. We tend to just look at a specific time period where performance was good, or we tend to only remember the good traits. Even when we get good data, how we evaluate that data can become compromised. For example, if an investment did well, we'll take the credit for our finely tuned financial smarts. If an investment did poorly, well, obviously it wasn't because we made a mistake. It's because an unforeseeable outside force caused the problem.

Another challenge is deciding when to take action. It can be tricky to know when to take and, more importantly, when not to take action with a trade. And even after we do, there's always the specter of one of the most powerful emotions, and that is regret. Who among us hasn't looked at all the data and made a reasonable decision, and then if it didn't pan out, immediately was consumed with regret, even though we did the best we could given the information that was available to us at the time?

Those are just a few examples of how it's difficult for us to be impartial observers of our own financial lives. Now let's get back to Kasey and his wisdom and knowledge on navigating portfolios.

I had a couple of questions here on losses earlier. You mentioned it's so easy just to see the unrealized gains and losses when you log into your account, and it creates some interesting emotional dynamics. The first one is, if you see something that you own is dropping really rapidly, that generates a powerful emotional response. How do you make sure that doesn't turn into panic? Or how do you make sure that people are kind of thinking it through rather than just reacting instantaneously to sort of a panic sell, which may not be appropriate?

KASEY: I think the challenge you described is selling eliminates that emotional pain. So you have the visceral reaction to seeing the losses, and by selling, that gives you the closure, problem solved. The issue is that you are immediately realizing those losses. And more importantly is that we are being thoughtful about why we are choosing to sell that stock.

One thing that I would call out, and this is where I love all of the behavioral aspects that you talk about on this show, but one of those is the concept of loss aversion and recognizing that we as humans all experience losses much greater than we do gains. And so that's why you have this visceral reaction to losses. But once you know that you have that, now it's important to take a pause. And I talked earlier about the concept of convenience. Now this is something that I would want to have friction, where we don't want to react quickly. And so the way to create friction, you can do it with time. So often I will say create a 24-hour rule. If you suddenly see losses, and you have a reaction that you want to sell, try to take a day and make sure that that is something that you believe is important in your portfolio.

Another way is to write it down. And this is a great one, I would encourage people to consider it, is to just simply write down one sentence. And the sentence is, "I am selling because …" and then fill in the rest. And if it is because the stock went down, that is not a good enough reason. So it's important to, again, either try to give yourself time, try to validate why you're making a decision. And all of that is going to be based around what has changed. And if it is just the price, it's probably not enough to make a change in your portfolio. It really should be about the goals, your needs, your cash flow, something that is not price driven because price provides information. There's no doubt about that, but it doesn't require immediate action.

MARK: What's interesting about losses is that at the other extreme, we see investors often holding on to losing positions far longer than they probably should. It's almost as if they're unwilling to admit that they made a mistake, and they're just hanging on to this thing. And frankly, the fundamentals of the company just don't, or maybe it's a mutual fund or an ETF, it's just not doing very well. At some point, you need to throw in the towel, but that doesn't always happen.

So talk to me a little bit about what's going on there. Then maybe the second part of the question here is, under real-world conditions, you don't always know which one is which. Which is something I … hey, it's been dropping, and I really should be patient versus, at some point, you need to cut your losses and move on. So the second part of the question, what's a good process that people can use to separate out those two situations?

KASEY: I like the framing. It's a good counter to that. You have investors that sell too fast after the losses, and you also have those that hold on too long. Again, I think both of those are coming from a place of trying to avoid regret in some capacity. For the first part of your question, I think the thing that I see often is that folks are trying to avoid making a mistake. And when you are holding on, you're often thinking, "I want to try to find a way to get back to the price that I paid," back to even. And the thing that is important to keep in mind is that the price that you paid for any given stock, that is not a price that the market cares about. That does not matter where you bought it as to where the price may go tomorrow. And so really the portfolio is going to be focused on the other components that we've talked about before and why you actually hold that position.

So to the second part of your question, and this really gets down to the challenge of all. If the stock has gone down, and I don't want to sell too quickly, but then I also should be thoughtful about just holding on, one way to consider how to make that decision is—if I had this amount in cash today, would I buy this holding right now?

And the reason it becomes difficult is because you already own the stock, and there is a sunk cost associated with owning that stock and the price that you paid. And so instead, it really needs to be a re-evaluation of that stock in this portfolio in this size. And that is what we mean when we think about reconsidering a portfolio in a deeper review.

MARK: Kasey, as we're recording this, I believe in fact that the Dow hit an all-time high today. I'm not sure what it'll be when people listen to this, but I guarantee you somebody out there is saying, "It's going to come back. It's going to drift back, and then I'll put some more money in the stock market." Or let's say people are listening to this, and the Dow's dropped six days in a row. They're thinking, "OK, well, you know, I think it's going to drop a few more, and then I'll start jumping in." They're basically, they're trying to market time, and it's very seductive. As you think about the long-term evidence, what does that tell us about the cost of waiting versus being a more regular investor, staying invested, not get too wrapped up in these kind of minute timing decisions?

KASEY: Market timing is very seductive. It oftentimes feels safer than trying to make a decision. The challenge is that those that are sitting in cash waiting to get in, that is also a decision. And so there is this balance of, if you are going to try to time markets and step out and step back in, you have to be conscious that there are two parts of that decision. And oftentimes people only think about the first one, and then they don't on the second part. And you need to be really conscious about defining when you are going to be getting back in if you feel the need to step out.

The other thing too is it doesn't always have to be an all-or-nothing decision. And so these are changes that can be made that are about the broader portfolio. And so when you think about that quote-unquote "timing," maybe if you are having this reaction to a change in the market, that you are not comfortable with the risk profile you have today. It may be a circumstance where you need to adjust your portfolio. You don't need to completely remove any exposure to the stock market, as an example.

MARK: We've been talking about risk at various points throughout the conversation. But earlier, you used the phrase "risk capacity." You were, I think unintentionally, conveying that actually there a lot of different dimensions to risk. And so I want to make sure that, before we get done with this interview, I wanted to hear you talk a little bit about risk capacity as a concept, and why it's important, and how it differs, though, from when … normally, we think about risk tolerance and volatility as being kind of a different thing. Separate those two out and why it's important that people have a good handle on both.

KASEY: That was astute listening. Risk capacity, that is math. That is definitionally just a time type of concept. Risk tolerance is more about the behavioral aspect. And so the way that we think about it is capacity is how much risk can you take? And the biggest factor there is the time horizon component. But it also brings into things like your spending needs or your income stability, what you need in liquidity and other, again, mathematically driven topics.

The tolerance side is what can you tolerate? How much volatility can you emotionally live with? At what point do you feel like you need to make a change if markets were to move, let's say, 20%? And so we want to think about capacity as oftentimes setting the bar at what level of exposure you can have in a portfolio to risky assets like equities.

And tolerance will oftentimes reel that back in because capacity decides this is how much I can take mathematically. And then tolerance is, are you comfortable taking that much risk? Or would it make more sense to try to do less to make sure that you're going to be more likely to stick with that portfolio? That's the combination. That's how we think about both of those components. But it's important to have both when you're building a portfolio.

MARK: Makes a lot of sense. Just a couple more questions and I'll let you go. When Nathan, our producer, and I, we were kind of kicking around questions, Nathan had a great concept here. I kind of wrote it down because I want to make sure I didn't screw up the wording because I think it's just fantastic. Markets don't move in silence. They're surrounded by headlines, commentary, and strong narratives. So talk to me a little bit about how those narratives kind of distort portfolio positions and portfolio decisions, especially given, as you were talking about right at the very beginning, the relentless news cycle. There's always going to be these narratives, and let's face it, sometimes things that are driven by a headline that might feel reasonable in the moment, it's actually working against your long-term interests. So what are your thoughts on that?

KASEY: Headlines is a theme that I am seeing more and more from our investors, and I want to give credit where credit is due. Social media and news outlets have done a phenomenal job of understanding what emits a reaction from their users. And the issue that I have is that now it's starting to show up more in the financial space, and we're starting to see investors feel the need to react to these headlines. And what that means is we have news and social media that is constantly talking about recent events, and it makes it feel very important and like it's going to be a permanent situation, and therefore taking action is incredibly necessary. And I am constantly trying to highlight that we want to think about building the portfolio before the headlines come out so we can remove the emotional response.

And we know that those headlines will be there. We know that these events will happen and they will potentially move markets, but that's all part of the plan. And so it is important to always question every time we see these headlines. And what often happens is whatever is the most recent event is going to show up as being the most important thing to respond to. And so recently we've had higher inflation due to higher energy prices. Immediately we'll have clients that are looking for an allocation to inflation hedges. And so we're always trying to think about this ahead of those events happening and not trying to react after they already have.

MARK: Yeah, I think investors face this conundrum. On the one hand, they don't want to ignore their portfolios, but at the same time, particularly if they're longer-term investors, they don't necessarily want to obsess over it the same way an active portfolio manager would. So how can someone stay engaged without turning investing into essentially another job that they've got to do in addition to their day job?

KASEY: Time is a big challenge. I love that people are interested in staying engaged. This is something that I think we've seen more and more. The amount of folks and investors that are focused on markets and their portfolio is more than we've ever seen in the past. But to your point, it's important to say that you see that as an interest in being aware of what is happening, but not feeling like you need to immediately take action.

So I think many of the things that we talked about is what I'm going to reiterate. I think that the monitoring aspect is important. Be aware, but understand what's the purpose of your portfolio. Understand the goals that you have in place, what you're trying to do with that money, more so than how do I just, let's say, tinker with some of the allocations. And that can often be driven by those headlines, but it also will come from some daily performance that you see or just a general sense that I should be doing something.

And oftentimes I think it's OK and, again, prudent, to not take that action. And so the other thing too that I'll call back to some of the rebalancing guidance that we talked about, having the regular cadence of when you're rebalancing, being thoughtful about your diversification, all of those things give you comfort that knowing when those events happen and the need to do something, you can take a moment and go, actually, I have a plan for this, and I feel comfortable with why I set this up originally.

MARK: Kasey McCurdy, chief portfolio strategist of Schwab Wealth Advisory. Kasey, thanks for being with us.

KASEY: I appreciate you having me. Look forward to coming back.

MARK: That was a great discussion with Kasey. And to steal a lyric from the musical Hamilton, which is fresh in my mind because we mentioned it in the last episode, he "dropped some knowledge," and I hope you got a lot out of it. If you'd like to learn more about portfolios, Schwab Wealth Advisory is here to help. We'll link to it in the show notes. We'll also link to the portfolio management section of our website. You can learn about diversification, asset allocation, rebalancing, risk, and other ways to combat biases. It has articles like "7 Good Ideas for New Investors" and "Retirement Portfolio Assets: Allocation by Age."

Thanks for listening today. If you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe. That's M-A-R-K-R-I-E-P-E. As always, we'd appreciate it if you'd give us a rating or review on Apple Podcasts or comment on the show if you listen to it on Spotify. We always like new listeners. So if you have a friend or two who might like the show, please tell them about us and how they can follow us for free in their favorite podcasting app.

For important disclosures, see the show notes and schwab.com/FinancialDecoder.