If you found yourself at this year’s Master Investor show on Saturday you might have caught my talk on tackling some of the most common behavioural biases affecting investors today.
Confirmation bias, anchoring and the Ikea effect all had their due mentions, with a few tips and tricks to get around them thrown in for good measure. However, I hope the main thing investors in the audience took away was the importance of nurturing one particular trait in the new tax year: 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.
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.
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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 at the start of the tax year 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 this year, my own nudge is to have a look at the four my colleague Tom Stevenson is putting in his own account.
Tom has also recently shared his latest Investment Outlook in a live interactive webcast. Watch the video and read the report here.
More on making regular contributions to your investments.
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.