In a previous incarnation I was an English teacher.
I remember one particularly important lesson in which I was being observed. I had prepared for weeks - flash cards, activities, peer assessment - the whole Ofsted gamut. And then someone spotted a dog in the playground and the usually tame kids went mad. Mr. Lane’s lesson shot to pieces.
But, rather than berate me, the inspector just reminded me to not let brief episodes like this overwhelm the whole lesson - it’s about recognising it, addressing it and moving past it.
I’ve thought about that lesson a lot over the past few weeks. With Brexit, trade wars, interest rates changing trajectory and oil prices darting up and down, the proverbial pooch on the hopscotch is eliciting emotional reactions in markets and behavioural biases among investors.
We all like to think we’re prepared and will act logically in the face of political change or market movements and our plans most often involve talking about what actions we intend to take. But, if you haven’t set yourself up to confront your own behaviour first, all the logical decision-making can’t take place.
Here are two of the most common behavioural biases investors have fallen into over the past few years, simply by not thinking this way, and a few ways you can tackle them:
We love being right. In fact, behavioural studies have shown that even in the face of overwhelming evidence to the contrary, we often secretly still believe we know better. This is dangerous in investing because we can begin research into a specific idea or company looking for the positives and ignoring the negatives entirely. We can frame questions to back up what we already believe or only click on the search results we think will support our claim.
All of this stops us from being objective, and breeds bias into our decision-making, investment or otherwise. Think about your carefully curated social media feed - chances are it’s a bit of an echo chamber, reinforcing your own beliefs rather than challenging them. And when it does present conflict, we tend to swipe it away, dislike, or unfollow.
Bottom-up research, with multiple interpretations of company results and data are incredibly important to combat this bias. As well as having someone you can always bounce ideas off, and isn’t scared to challenge you. Luckily, teachers have around 25 of these people at any one time.
The price we see when we first meet an opportunity, be it a share or a fund, has the potential to completely distort how we treat that investment. How many times have you decided something was cheap or expensive based entirely on an arbitrary price you have in mind? If you had come across that share on a different day, would it now be cheaper or more expensive? The point is that prices should often be the last thing you look at. Research begins at the company level, with balance sheets and management capability - only then do prices come into the equation.
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.
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.
Outsourcing the asset allocation to the pros means you don’t have to make decisions when you feel nervous or just don’t know what to do.
That’s why it’s so important to have a portfolio ready to deal with whatever happens. When a surprise event or presidential tweet pops up it’s already too late to position your investments to benefit, it’s all about having it diversified from the get go.
Funds like the Fidelity Select 50 Balanced Fund take the guesswork out of it all. Manager Ayesha Akbar populates the portfolio with funds our analysts rate highly, and looks to get a blend that aims for growth, with an eye on preserving capital as well. She pays attention to making sure assets are uncorrelated, and can pass the baton between themselves so parts of the portfolio are performing at any one time.
Hear from Ayesha Akbar in the video below.
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. Select 50 is not a personal recommendation to buy or sell a fund. 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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Market volatility can feel like an investor's worst nightmare. But if you take a few simple steps to prepare, you can keep a calm head when it arrives.
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