“Investing isn’t just about numbers and spreadsheets. It’s more emotional and based on experiences and instincts,” said Ryan Gubic, founding father of MRG Wealth. “Some of these instincts, while helpful in life, can silently work against us when it comes to our money and personal finances.”
How behavioral biases influence investment decisions
When an investor panics, biases often arise, leading them to, for instance, sell when the market falls or chase a stock that has performed exceptionally well, he said. It could also present itself, for instance, by holding on to a losing investment for too long before admitting the error and making a course correction, Gubic said. “Simply put, it’s about reacting rather than following a plan.”
Brooke Dean said she always encounters prejudice from her clients. One of probably the most common symptoms she sees is herd mentality or jumping on the bandwagon, said Dean, a Calgary-based senior wealth manager at BMD Financial Ltd.
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She cited a recent example of how some investors went to extremes in buying gold as the value of the commodity shot to unprecedented highs. “As soon as I hear that people are buying gold bullion and storing bars in their basements and things like that, that’s usually when the cap is reached,” Dean said.
If you hear a couple of trend and everyone seems to be already doing it, “it’s probably too late to buy whatever that is,” she added.
The Danger of Thinking You’ve “Figured It Out”
Dean said an overconfidence bias is most evident amongst her younger clients, which she called one in every of the “most dangerous” biases amongst investors. She said many younger Canadians are engaging on social media platforms like Reddit and on the lookout for investment advice – and sometimes it will probably work out. However, there is no such thing as a guarantee and losses may occur.
Typically, after just a few successes, investors start taking more risks because they think they’ve it found out, but eventually they feel humbled by their experiences and losses, Dean said. She said what they actually need is a diversified portfolio and not only attempting to beat the market on a regular basis.
Gubic said when his clients come to him with concerns, it is vital to acknowledge their feelings and unravel them. “The goal really isn’t to eliminate bias, because I would say that’s not realistic,” he said. “These are our human feelings. We will feel it.” It’s about “not letting emotions dictate you,” he said.
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A holistic financial statement keeps emotions in check
Gubic said a written financial statement can bring structure and help avoid prejudices. He said the plan shouldn’t just concentrate on investments but provide a holistic view of the important thing areas of monetary life and include taxes, retirement, estate, risk and insurance needs along with investments.
Ashley Agnew, behavioral scientist and authorized financial therapist at Edward Jones, said a comprehensive financial statement is a “living, breathing tool” that can assist block out the noise. “The brain wants a plan, and once your nervous system is relaxed, the emotional overwhelm subsides and you can start incorporating logic again,” Agnew said.
Agnew said that playing the role of devil’s advocate and being interested in one’s beliefs also can help counteract biases reminiscent of confirmation bias – or the tendency to verify what you already consider. She said sometimes awareness of bias will be the intervention you would like. “This is something we can all do. We can all keep a reflective journal,” Agnew advisable.
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