Beyond fear and greed, other powerful behavioral biases can be found in almost all investors, both private and professional, and are often exhibited by enduring habits and behaviors that are very difficult to self-identify. These biases inform our bad decisions, the mistakes that we continue to make without even realizing that we are making them, let alone why.
Discipline and self-sufficiency are valuable commodities when it comes to managing your personal finances, yet we often find ourselves stuck on the bumpy road of bad decision making. We humans are hard-wired for recognizing patterns of behavior and making decisions on the patterns we already know and see, but when it comes to investing real money in real markets, our vision and judgement may be clouded by a number of fact-patterns we don’t anticipate, or worse, decided to ignore because our ego got in the way.
Nobody likes an armchair quarterback, and we don’t want to be accused of trying to be armchair psychologists! Our goal is to examine and understand some of the most prevalent behaviors that can derail your portfolio, offer ways to identify them and seek potential solutions.
As an investor, you’ve been coached, whether you know it or not, that there are worse investments and there are better investments. Maybe that’s true to some extent, but it’s time for a reality check:
There are worse investors. There are better investors.
Many good investments have suffered at the hands of worse investors, so Behavioral Investor Coaching focuses on fixing the investor, and it benefits the investor in a number of ways.
First, there is no “product bias.”
Financial products are tools, solutions to solving very specific financial objectives. For instance, if one needs the highest amount of income, they might be best served by dividend paying equities, real estate or bonds, or something else entirely. None of the these are better investments than the other. They either fit the situation or they don’t.
All too often, a product is pushed that will more than enhance salesman’s income through high commission schemes, yet be totally wrong for the investor.
“Individual investors who ignore the prescriptive advice to buy and hold low-fee, well-diversified portfolios, generally do so to their detriment.” 1
“…apparently uninformed investors trade actively, speculatively, and to their detriment…” 2
“…many studies document that individual investors earn poor returns even before costs. Put another way, many individual investors seem to have a desire to trade actively coupled with perverse security selection ability!” 3
“…real investors tend to sell winning investments while holding on to their losing investments—a behavior dubbed the “disposition effect…among the most widely replicated observations regarding the behavior of individual investors.” 4
Self-sufficient Investor Coaching is unbiased, conflict free and commission free since it is not about pushing financial products. Its about fixing the investor; the only goal is providing behavioral learning that can make you a more grounded, more productive investor. The essential tenet of Investor Coaching is to reduce situations where you are likely to make emotional decisions, and focus on those things that are within your control (like managing risk, taxes, costs, holding periods, account types, and so forth) and seek to establish a better personal framework, a decision making process that leads to better and more consistent outcomes.
One method to achieve better and more consistent outcomes is to “be the market” through Passive Make, a passive investing approach; in other words buying the whole market (like the S&P 500 or the Dow Jones Industrials), or entire sectors or industries (like energy, tech, or finance), rather than the individual stocks that they are comprised of.
Look, you don’t beat the market, the market beats you. Wall Street knows that, but they are deeply invested in cultivating the errant belief that you can conquer.
“Markets are efficient,” and that investors are anything but. Wall Street knows that, too, but if they let the cat out of the bag, where does that leave them? Hey, you may not need them anymore!
Winning investing means being a better investor, not just finding better investments. Investments aren’t even half the equation.
On the other hand, goals-based investing, in the hands of a better investor, puts risk and return expectations in their proper balance so you can actually succeed.
What is successful investing?
Simply put: successful investing is defined by your having achieved your original financial goals. For instance, if your goal was being able to retire with X amount of dollars, and your projected savings rate would allow you to get there by earning, say 7%, when the markets could have given you 9%, but with more risk, and you got where you needed to be on the lower and less risky number, were you a successful investor? Hell yeah, you were!
Winning investors understand what drives them as investors, as individuals with built in biases and fears, and the resultant behaviors. Investments are not hard to understand.
Investor behavior, your behavior, is eminently more complex.
Works Cited by: Brad M. Barber, Graduate School of Management, University of California, Davis: and Terrance Odean, Haas School of Business, University of California, Berkeley