Understand your biases for objective investing
Investing is an emotional undertaking with high stakes and a large degree of uncertainty. When the pressure is on, investors sometimes revert to reflexive thinking, relying on their own intuition, biases and heuristics for investment decisions. As an investor, you can employ a thoughtful, deliberate rationale to reduce your biases from having a negative impact on your investment results.
By understanding your biases and when they come into play, you can mitigate your gut reactions with logic and objectivity for more effective investing decisions.
Typical investor biases to watch for
Loss aversion – clinging to underperforming investments because you are afraid to lock in a loss. Employ objectivity to step back. Stop looking at the original cost and consider the investment’s current market value, future prospects, and the original rationale – does it still hold true?
Performance chasing – investing in a manager or funds simply because it has been performing well. Counter this by also objectively looking at the current market environment, your assets and how they work together as a whole.
Status quo bias – the fear of bad decisions can paralyze the investor. Having a rationale for your investments, asset allocation and geographic mix helps sidestep this paralysis, because you have already effectively decided what to do.
Familiarity bias – investing in what you know to the point where adequate diversification is lacking. For example, Canadians tend to invest too heavily in the domestic market.
These are some of the typical biases that can hold people back from the best investment decisions.
Our new Behavioural Opportunities Fund, the first of its kind in Canada, leverages the latest research on behavioural finance to strategically mitigate typical investor biases, supporting clients to make rational and effective decisions with their investments.