How do you feel about your portfolio right now? Are you excited? Fearful? Depressed? Hopeful?
Since the study of behavioural economics started making its way into the investing world post-2008, there’s been growing interest in how investor psychology affects market outcomes. Particularly, a growing body of research has been steadily informing us about the most common investor biases, and what we might do about fixing them. Things like loss aversion (avoiding taking a loss), the disposition effect (selling winners too early), and anchoring (relying on the first piece of information received), are some of the more well-known foibles that negatively impact performance.
As much as Advisors and Portfolio Managers are learning to use rule-based systems to help avoid falling into these types of traps, the feelings that go along with them remain unavoidable. Although a good rules-based system works over time, we’re still human -- it still feels great to win and crummy to lose.
In that light, over the past 22 month bear market in Canada, I’ve noticed a general trend towards advising clients to downplay their feelings. Things like “don’t make investing emotional” you might hear from just about any Advisor.
But what if you did listen to how you felt? And what if it was entirely useful to helping you make good financial decisions? Have a look at the chart below.
So many people ditch a great investment opportunity not because the numbers don’t make sense, and not because they don’t believe things will eventually turn around. They simply can’t bear to keep feeling so bad about what’s happening to their money. Even rational people have a breaking point. But what if, next time, instead of breaking, you remember the chart above? Acknowledge the feeling, situate it in the spectrum, and act accordingly. The same works vice versa for getting into an investment opportunity for the thrill…
If you can make a regular habit of checking in on how you feel about your portfolio, and writing it down (accountability matters!), you might end up with the most useful custom-tailored investor database on the planet – your own. The more you pay attention to how you feel about your investments, the better you will be able to recognize the point of maximum financial opportunity.