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Making decisions under pressure

Putting theory into practice

Daniel Lane, Fidelity Personal Investing, 12 September 2019

I find myself talking about our natural behavioural biases a lot these days, most recently at London’s Master Investor Show, in front of an audience keen for some tips and tricks to becoming a better investor.

We went through some of the classic reactions to high and low share prices and how to stay calm amid it all however, I hope the main thing they took away was the importance of nurturing one particular trait: self-awareness.

Most behavioural biases tend to lose a lot of their steam when we realise they are flaring up. The problem for most of us is that, by their very nature, their influence is frustratingly hard to spot and even more difficult to counteract. If it were a case of just turning them off we’d all be doing that by now.

This is why remedying inherent biases in our decision-making should play second fiddle to actually recognising them when we see them in our thoughts and actions. But there is a much easier way - taking our emotional selves out of the equation altogether.

Nudge

A big threat to the long-term performance of our investments is how we deal with making decisions under pressure. Unfortunately we’re terrible at it, so taking steps to make sure we can’t exert our nervous energy onto our portfolios is often a very good thing.

Setting up a regular investing plan is a great way to make sure your money is drip-fed into the market at frequent intervals, without the psychological effects of graphs and prices skewing our thought processes.

It’s an example of what economist Richard Thaler calls ‘nudge’; a kind of small act that influences or prevents action without being too intrusive or instructive - think of primary school teachers rewarding table five for their good behaviour instead of scolding table three. There’s an unspoken incentive in there somewhere and a clear route that the little rascals can, importantly, choose to take.

For us the incentive is generating the long-term compounding we all talk about rather than waiting in cash to catch the bottom, and inevitably waiting too long.

The reason nudge works is because we’re hard-wired to make quick judgements to get what we want, using whatever information is at hand, rather than considering the bigger picture.

We experience most nudges without realising it - pension auto-enrolment, buying the second-cheapest bottle on the wine list, buying the eye-level supermarket product - and sometimes this gets us into trouble, like overpaying for energy bills because we’ve gone with the first company that comes to mind. So doing the quick and easy thing by setting up regular ISA contributions avoids the knee-jerk reactions for the rest of it. Don’t underestimate the power panic and greed could have over the next 12 months - take steps to avoid it now.

And if you’re looking for some funds to put in your ISA, my own nudge is to have a look at the four my colleague Tom Stevenson is putting in his own account.

More on making regular contributions to your investments

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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