How to invest for the long run

How to invest for the long run

The end of year brings with it a time of reflection and of setting new goals for the new year ahead. When you look back on the year I’m sure that you’ll find a number of your plans were derailed, and your plans to be more financially secure have possibly suffered a set-back or two. It may be the case that you aren’t sure where or why things went astray and this article will look at the challenges of investing successfully for the long run.

Investing successfully requires a planned approach that is well implemented and adhered to in the face of changing conditions.  In a way this is very similar to the challenge facing Australians with their health and fitness.

As a whole Australians are happy to employ a fitness coach and nutrition specialist in to keep their health goals on track, but when it comes to keeping financially fit, many see financial advisers as more of an investment picker than as someone who can actually coach them through their goals and plans.

Sticking to an investment strategy can be difficult and although the media is full of supposed experts, it is important to determine an approach that is appropriate for our personality and then remain aligned with that approach.

Investors often have a few good years and then ‘blow-up’ or struggle to consistently grow their wealth. Often the issue is not the investment approach but the emotional biases that result in the investor deviating off the planned course. This deviation is often due to one or more biases that are entrenched in their decision making.

Below are some of the more common investment biases that pull investors off the road to financial well-being:

  • Optimism Bias.  We believe that our decision work out well and studies confirm that 85-90% of people think that the future will be more pleasant and less painful for them than for the average person.
  • Loss Aversion. We are highly loss averse.  Studies confirm that losses are felt between two and two-and-a-half as strongly as gains.  As a consequence, we tend to make bold forecasts but timid choices and often divest in the face of small losses.
  • Self-Serving Bias. Is a belief that the good stuff that happens is my doing while the bad stuff is always someone else’s fault. With this mind set it is difficult to improve your investment approach and learn from your mistakes.
  • Analysis Paralysis. Too many choices can lead to indecision. This is simply the mind’s inability to deal with information overload.  Given the vast range of investment choices available it is often difficult to choose where to start and so we procrastinate.
  • Herding. Is the tendency to follow the latest, dare I say, ‘trend’. These are the kind of investments that your taxi driver gives as a ‘hot tip’. Whilst there is safety in numbers, often the herd suddenly changes direction and when the party is over the ‘trendy’ investment often ends up on the garbage pile.
  • Short Term Memory. We are all prone to give more emphasis to recent events and we tend to extrapolate these events into a long term prediction. This bias also tends to result in chasing last year’s winners and avoids taking profits.
  • Confirmation Bias.  As investors we may tend to make an investment selection first (from one of the earlier biases) and then confirm our decisions based on favouring commentary that supports our choice.

 

Investing for your financial future is a marathon. Unfortunately, because decision-making biases are often subconscious, we often do not realise the handicap we place on ourselves and the flaws in our investment approach.

Professional investors and advisers can draw from experience as they will most likely have already encountered these biases.  Making decisions based on a rational analysis and adhering to a chosen investment approach gives an investor an edge in the market.

Working with a financial coach provides you with an advantage over your investing biases. Having a regular review of your financial arrangements assists you to keep to the course and your financial adviser will keep you accountable to your agreed investment goals and your investments aligned with your strategic plan.

Are you ready to get on track in the coming year and want to discuss your options? Call our Financial Adviser Chris Kelly on 02 9633 5530 or submit a contact request.

This information, and any advice provided is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it.
Sacha Loutkovsky
sacha.l@orionfg.com.au
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