There is no shortage of discouraging financial news today. Rather than jumping on the interest rate and inflation bandwagon, let’s reflect on ourselves. As news consumers, using short-term information and trends to support long-term strategies is just one key to unlocking better decisions. However, this is not easily accomplished.
Just like periodic portfolio reviews, avoiding short-sighted financial decision-making is essential. Likewise, reviewing investment behaviors that might prevent your portfolio from achieving the long-term results you seek is important. As we assess the following investment behaviors, note that this is not an exhaustive list. Instead, I’m presenting a list of behaviors most relevant in today’s economic environment.
Consider the following four investment behaviors to see if you fit into one of them. Are you following the herd, creating investment strategies based on your fears from past experiences or observations? Or is your ego setting the course? Or maybe you’re using history to predict the future.
For example, according to The Dalton Review text on Investment Planning, “Availability Heuristic” behavior is a common shortcut some investors utilize. They rely on information that’s readily available in their memories or from various news sources. This shortcut may cause the investor to overweight recent events or patterns while paying little attention to longer-term trends.
Herding is another common reactive bias where the investor follows the masses, or “the herd.” The average crypto investor is especially susceptible to herding because of the influence of the rumor mill and other influencers. FOMO (Fear of Missing Out) is a driver behind this behavior pattern.
Then there is the do-it-yourself investor who navigates current market trends and relies solely on the financial information they consume. This can lead to “Overconfidence Bias.” Investors who do their own homework and research tend to be overconfident in their abilities. Their ego often leads to overestimating their risk tolerance, resulting in potential losses they might not be able to accept.
Perhaps the most relevant behavior to avoid is “Hindsight Bias,” which is when an investor looks back at what is known to try to predict the future. When we think about the last 2 decades, it’s tempting to assess where we have been to predict where we are headed, especially concerning real estate and interest rate trends. Although recent economic history is good for general knowledge, current economic indicators may suggest a different outlook.
One thing is certain; the financial markets are in a constant state of flux. Cycles are inevitable, and historically, the markets have recovered and gone on to new highs. I can’t believe the “Great Recession” was almost 20 years ago!
Behavioral finance is a fascinating topic for conversations. One reason is that you can have philosophical discussions with friends and family without revealing your own personal situations. Perhaps going into the holidays, you can avoid the risk of political discussions by bringing up the topic of investor bias. Have some fun with it. Happy Thanksgiving!
If you would like to discuss your investment behavior while doing a portfolio review or simply have a conversation on the topic, please contact me. I would be happy to have a conversation with you.
If you already have an investment advisor, congratulations. However, if you’d like to learn more about what investment advisors do for their clients, don’t hesitate to contact me at empiriKalpartners.com for an individual assessment
About the Author
Edward Vela is an Investment Advisor and Estate Planning Specialist at empiriKal partners, llc©, with 15 years of wealth management experience. He earned a Journalism Certification from the University of Massachusetts, a BA in Political Science, a Financial Planning Certification at UCLA, and an MBA from the UCLA Anderson School of Management. You can contact Edward at 925-300-8805 or email edward@empiriKalpartners.com.