Successful investing isn’t always based on picking the right stock, bond, region, sector, or strategy. More often, successful investing is linked directly to your behavior as an investor. Being aware of the behavioral influences on your decision-making process can make all the difference in your investment outcome, especially in times similar to what we are experiencing now. With the recent market volatility and the worries surrounding the impact of the coronavirus (COVID-19) on markets, consider how your responses to market volatility may be shaped by these six behaviors:
- Herding – This is the effect that leads investors to make decisions that are in line with those around them or with a large group of other investors. Recently this has been seen as everyone is selling stocks because everyone else seems to be. This also occurs when investors hear about the next “hot” stock (or a new investment strategy) and they jump into the new investment without doing their own due diligence. The herding effect limits an investor’s independent decision-making abilities and causes investors to make decisions based on what they hear others are doing.
- Loss Aversion – Investors are more emotionally affected by losses than gains. Investors are less excited to see their portfolio go up than they are anxious when their portfolio balance goes down. This can lead to investors holding on to losing investments for too long in hopes the investment recovers or they may avoid making a sound investment because they are afraid it might lose money.
- Information Overload – Investors now have access to an incredible amount of information – maybe even more than they can process. This abundant amount of information could lead investors to seek quick, simple answers to their investment needs. Having the quick and easy portfolio may not fit your needs or be the most efficient use of your funds. Investors need to be able to piece together the information that is available without getting overwhelmed by the volume of data or hire professional advisors who can help them analyze all of the available information to help meet their needs.
- Familiarity Bias – Investors prefer investments that are familiar to them and like to own stocks that are part of their everyday lives (think Apple or Google), that are associated with their place of employment, or stocks that may be in the news due to recent success. They may give bias to a certain segment of the market such as having only U.S. stock and leaving out international stock as part of the portfolio. Investors must be cautious not to develop an emotional attachment to their holdings or think that because it seems like a great product or service that it must also be a good investment. This bias can cause investors’ portfolios to become over exposed to certain holdings that carry additional risk they may not anticipate.
- Overconfidence -Investors overestimate the accuracy of their predictions. This behavioral bias may be especially relevant after a period of tremendous market growth like we saw in 2017 and 2019. Overconfidence leads investors to not place enough emphasis on what could go wrong. Investors may believe current market conditions will continue in line with their past success. This could potentially lead investors to take additional risks, exposing their portfolios to greater loss in the event of a market correction.
- Anchoring – Investors hold onto an idea or strategy for too long, even when they are presented with new information. They hesitate to make a strategic change or update to their portfolio even though information may dictate that a change is needed. Anchoring leads to portfolios that are stuck in their ways and may not be as flexible as they need to be in the ever-changing landscape of investments.
Being aware of different biases and tendencies may help you to spot these behaviors before they become a detriment to your portfolio. CCMI regularly helps investors navigate these impediments and helps them make decisions based on their long-term goals and portfolio needs. If you relate to any of these behavioral influences, give us a call to chat about how we can assist you.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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