Are you the greatest threat to your investments?
You might be.
Human behaviour is fascinating. Although we would like to be strictly rational when making decisions about investments, many of us may know, or suspect, that cognitive bias can have a significant influence.
Often the difference between an investment return a person gets and should get is related to human behaviour and cognitive biases. Selling out early, at the wrong time or not staying invested for the long term all (potentially) can be a function of human behaviour.
Many investors understand that you should buy low and sell high (or hold on for the ride), so why then do a substantial number do the exact opposite?
What can you do to not fall victim to the same psychological pattern?
Positive psychology lecturer, Harvard graduate and author Shawn Achor makes some very interesting and relevant points.
Achor suggests that we are all operating with a ‘duelling’ brain, which on the one hand has a knee-jerk emotional system (referred to as the ‘jerk’ and based on the ‘flight or fight’ part of the brain) and on the other, a rational cognitive system (referred to as the ‘thinker’).
During our daily lives, our actions are often determined by these two forces, the jerk and the thinker. Most daily challenges are better served by the thinker.
However, when we are feeling particularly stressed and overwhelmed, the chance that you are being ruled by the jerk is at its highest. This has relevance to your investments and investor behaviour when markets and conditions are at their most intense. Our very cognitive patterns may take us dangerously close to making investment mistakes.
When we sell our investments at exactly the wrong time, get seduced by the mainstream thinking of the day (which may distract you from making a sound, prudent decision), or simply don’t stay invested, our own behavioural and cognitive biases are at play. Herein lies the problem.
Here is what you can do about it:
- Self-awareness: be aware of what you are feeling, what is happening in your mind and body when you are thinking to make an investment decision. Even more so at times of stress (negative markets) and times where ‘everyone is winning’ (overly positive investment markets). For some, outsourcing investment decisions to experienced professional investment managers can be a good idea.
- Quality questions: Ask yourself high quality questions before you act. Why am I choosing to take this action? Is it supporting my big picture objectives? What cognitive bias am I displaying right now? What is the mainstream thinking of the day and is this having too significant a bearing on my decision? Could the mainstream thinking be wrong? Am I looking to act because of the ‘jerk’ or because of the ‘thinker’ and is my decision based on sound reasoning?
- Think long-term: Realise that investments work in market cycles, both up and down and investment thinking should generally be much longer term than most people employ. Think 5, 10, 20 years ahead, not 1 or 2 years.
- Seek trusted quality advice. Ever noticed how it is easier to see clearly your best friend’s relationship issues and what they should do, rather than your own? The same applies with investments and long term financial planning: when you are yourself ‘at the coal face’ you may not be able to see the big picture as clearly as you should, as ‘the fire’ is dominating your perspective. There are important reasons why seeking trusted, quality advice can make a positive difference to you.
We welcome the opportunity to discuss this and other topics with you in person.
We human beings are intelligent, but often exhibit behaviour that, in times of panic, will prove sub-optimal. As Shawn Achor puts it ‘common sense is not common action’.
I hope that you can use the thoughts in this article to improve future money related decision making in your life.
May you experience an abundance of prosperity.
Reference: ‘The Happiness Advantage’ by Shawn Achor, pages 132-136.
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The views expressed in this article are solely those of the author; they are not reflective or indicative of Millennium3 Financial service’s position and are not to be attributed to Millennium3. They cannot be reproduced in any form without the express written consent of the author.
Incito Wealth Pty Ltd is a Corporate Authorised Representative of Millennium3 Financial Services Pty Ltd ABN 61 094 529 987 AFSL 244252
Disclaimer: Millennium3 Financial Services Pty Ltd ABN 61 094 529 987 AFSL 244252. The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out. The views expressed in this publication are solely those of the author; they are not reflective or indicative of Licensee’s position, and are not to be attributed to the Licensee. They cannot be reproduced in any form without the express written consent of the author.
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General advice disclaimer This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice and consider a Product Disclosure Statement. The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to Millennium3. They cannot be reproduced in any form without the express written consent of the author. Furthermore, the information on this website is for Australian Residents only.