07 Jul 8 reasons why your investments are lagging
There is no doubt that investing involves taking risk. Some feel that it is scarier than a Vegas fun park roller coaster whilst others feel it’s no more of a risk than getting into the car (though that might depend on who’s driving!)
How we feel about investing is a matter of a number of factors but the main ones are previous experience, (sometimes) education and often any bias that may influence our judgement.
As an example, if you grew up with a family that invested in the share market and discussed the market, you would see it as a part of life. If however, one of your parents instilled in you that the share market was ‘a casino’ you might be reluctant to allocate any part of your hard-earned savings to shares.
The influences noted above manifest themselves as biases in our decision-making. One of the greatest challenges for ALL investors is managing these biases when they invest.
There was a lot of discussions and investigation into investor biases following the Global Finance Crisis and given that we are enjoying a very long Bull Market, I thought that now would be a good time to revisit some of the biases that hamper a successful long-term financial plan.
- Confirmation Bias is where, despite our intention to investigate the facts and reach a conclusion, we tend to reach a conclusion first. Thus we gather facts in a way that supports our pre-conceived conclusions. When a conclusion fits with our desired narrative, so much the better, because narratives are crucial to how we make sense of reality.
- Optimism Bias. This is where our subjective confidence in our judgments is reliably greater than our objective accuracy. It is a product of living in an overconfident world. In a finding that pretty well sums things up, 85-90% of people think that the future will be better for them than for the average person.
- Loss Aversion. Research has found that losses are felt between two and two-and-a-half as strongly as gains. Therefore, when it comes time for us to act, our optimism and risk aversion conflict. As a consequence, we tend to make bold forecasts but timid choices.
- Self-Serving Bias pushes us to see the world where we control the good stuff that happens while the bad stuff is always someone else’s fault.
- Analysis Paralysis. Intuitively, the more analysis we have done, the better. However, the truth is that too much information and conflicting opinion makes taking action too difficult.
- Herding. We feel more comfortable making a decision that we find others are also making. This tends to result in overbought and over sold markets.
- Recency Bias. We tend to extrapolate recent events into the future indefinitely. As an example, the lowest broker growth expectations for stock markets came just after the lows of the financial crisis.
- The Planning Fallacy. The planning fallacy is our tendency to underestimate the time, costs, and risks of future actions and at the same time overestimate the benefits thereof. Thus we tend to underestimate worst cases and why it takes longer to complete a task than we expect. It’s why projects tend to cost more than estimated.
Whilst some of these biases may be readily recognised, overcoming them requires a level of investment discipline and in most cases, coaching to keep on track.
One of the great opportunities offered by working with an adviser is the ability to work as a team. In this way, the adviser can coach an investor and establish longer term investment strategies that overcome their biases.
In working towards a decisive future goal, a plan can assist you to keep on track and avoid falling into overreactions and short-term decision subject to decision biases. If these have been holding you back, now presents a great opportunity to start working towards a more decisive future, not constrained by your personal conditioning.
It’s something I’m passionate about and I’d love to help you understand, manage and grow your nest egg over time, so please call me on 02 9633 5530 if you’d like to discuss your options.