Investor Behaviour – don’t listen to the noise!

Are you a high risk taker or do you prefer low risk options? Do your actions imitate your behaviour? Managing investor behaviour is my priority number one and its easier said than done!

Behavioural finance teaches us that humans like to think we make rational decisions with our money however history shows that when the going gets tough we often make the very worst decisions with our investments. Behavioural biases are formed based on our past experiences and feelings that we develop over time.

It’s probably no shock but a lesser perceived contributor to poor decision making can be the media. The media is in the business of selling newspapers and bulletins by spreading negative news stories. The media understands that there is a higher ratio of fear to greed in most people. So therefore, you hear more negative news. When was the last time you heard a news story about the share market rising and everyone making money? The reality is that positive stories and up markets don’t sell newspapers, so this is why we do not hear about them. It is important to know and understand this when you next read the headlines - European Debt Crisis, Brexit and Trump vs Rocketman. Recency bias is a cognitive predisposition that causes us to recall and emphasize recent events over those that occurred in the past. Recency bias can cause investors to make their forecasts based on recent events and often enter or exit an asset class at the wrong time.

Another contributor to poor investment behaviour might be your local BBQ or dinner party! Many have fallen prey to what I call dinner table advice. This is where someone tells you about their great investment success story and you think you need to jump into whatever they have been doing. Investments of any kind need extensive research and should be tailored to your personal goals and situation. Often these stories are embellished or lack (important) detail on the circumstances. Most of us will suffer a little from confirmation bias. Confirmation bias is where we tend to look for and notice what confirms our beliefs whilst ignoring or undervaluing what contradicts them.

If you are close to or in retirement these headlines and dinner table advice can be a cause for alarm and we encourage you to pick up the phone to discuss your concerns before taking any drastic action. One thing is for certain - there will always be ups and downs in the market. Better information, education and understanding your investment strategy can greatly assist your outcome and behaviour. It’s also one of the most important intangible benefits you will receive from ongoing advice.

This information contained in this document has been provided as general advice only. The contents of this document have been prepared without taking account of your personal objectives, financial situation or needs. You should, before making any decision regarding any information, strategies or products mentioned in this document, consult with your GPS Wealth Ltd financial adviser to consider whether it is appropriate having regard to your own objectives, financial situation and needs.