Behaviour Equals Risk
Behaviour Equals Risk
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Behaviour Equals Risk
Your Behaviour and Emotion usually dictate your actions and this can lead to irrational decision making when investing. When a person is irrational there is a tendency to ignore facts and the circumstances that are transpiring around them. Not understanding the normal emotional response you feel during different stages of a market cycle is likely to lead to further stress, anxiety and a perceived need to eliminate or reduce the cause (your investment). This is when irrational decisions are made and this is usually where the old saying comes true “the rich get richer, the poor get poorer”. It’s not because the rich are smarter, it’s because they can afford a team of professionals to take the emotion out of the decision-making process and act on facts to ensure a rational decision is made. Knowing the investment has fallen significantly in value a professional team would ask the question “is the investment at risk of a total loss, if not, are we better to invest more or are there other more profitable opportunities in the market?”. It is the wealthy’s ability to purchase at a lower point in the market when everyone else is panicking (selling), this panic creates opportunity which is why the old saying is mostly true.
The Ups, The Downs & the in-betweens
Everyone experiences changes in their mood, behaviour and commitment, if you don’t, well you’re not human (go away Robo). This issue with investing is that your behaviour, mood and commitment are generally linked to the investment return you experience. The issue is that to make money you need to inverse (flip) your behaviour in a normal market cycle. The reason is that when you buy an investment is likely to be the key difference in making no money, some money or a lot of money. AMP Capital has constructed a perfect illustration (right) of what most investors experience in behaviour during different market cycles. To be successful with investing you need to flip (inverse) this behaviour.
Herd Behaviour
Herd Behaviour is pretty self-explanatory; it is where you follow others rather than make your own decisions. When it comes to investing, herd behaviour is quite common to experience due to fear of missing out, otherwise known as FOMO. Herd Behaviour is driven by emotions rather than rational behaviour and you need to be really careful when acting on emotion. Often little attention is paid to investment fundamentals as investors focus on what other people are reacting to in the market. Today, this is amplified to a point of serious danger through media outlets and social media which are most of the time unqualified. Our advice process uses three safety mechanisms to reduce your chance of falling into the trap of Herd Behaviour.
Financial Advisers
Fintor’ Financial Planners/Advisers 99% of the time will recommend a diverse investment portfolio containing multiple investment managers who all have been vetted by our investment research houses, Lonsec & Zenith. Your Financial Planner/Adviser should be your first point of call as they can help you manage your emotion, explain the facts and make sure you are making rational decisions.
Independent Investment Research
Fintor uses two independent investment research houses, Lonsec & Zenith, whose primary job is to evaluate the safety structures of each investment manager which is recommended in your portfolio. Each investment manager is also benchmarked against their peers in the asset classes they invest. This isn’t a fool proof process, but selecting multiple quality teams with a great track record goes a long way to reducing your concerns and worries in negative market cycles.
Professional Management
When Fintor creates a portfolio for a client based on their tailored risk profile we select from a multitude of investment managers in each asset class with your preferences in mind. A typical Fintor portfolio will have 10-12 investment managers. Importantly, each investment manager will hold 20-50 individual investments. The result is a portfolio with over 200-300 different investments. The portfolio will likely experience negative returns in bad market cycles, but the likelihood of 300 companies going bust before a professional management team can make changes is very, very low.
Here is what to look out for when investing
Investors often experience emotions of optimism and greed when markets are rising, and fear and panic when markets are falling. Little attention is paid to the investment fundamentals. This means Herd Behaviour rarely leads to successful investment outcomes.
Here are a few examples of behaviour to watch out for:
- Investor greed and a fear of missing out
- Strong, sustained rallies and extended valuations
- An influx of Initial Public Offerings, Mergers and Acquisitions
- Hearing “this time it’s different” or “unprecedented”
- Everything moving together, regardless of Quality
- Media headlines talking up the latest investment trend, E.G Cryptocurrency
I know best!
Overconfidence in a world of uncertainty is usually not a good thing. We all know there are no guarantees in life, but our brains are often subconsciously working against us and this is why it’s good practice to regularly challenge our investment views.
As an Investor, you will be prone to certain psychological behaviour (bias) and of all the psychological biases investors are prone to overconfidence is perhaps the most pervasive and damaging. Simply put, this is where confidence in our own judgements is greater than it actually is.
The vast majority of people rate themselves “above average” among their peers when it comes to positive traits, such as driving ability, employment prospects, or life expectancy. In one of the most famous surveys conducted in the United States of America with an overwhelming majority, 93% of American drivers rated themselves as better than average!
Here is the truth, you’re not better than 93% of people in all aspects! That said, your abilities, the people around you and your chosen Financial Team’s collective abilities to make a collaborative decision has a good chance! Everyone vets the decisions of the other, allowing the best chance for a rational decision to be made. This is the power of working with a Financial Team, not their ability to be a guru in every facet of the financial market. If someone tells you this, they’re lying!
Fintor’s Suggestion
Treat investing like retail shopping, no one rushes to the shops when everything is full price (with the exception of Christmas). Treat a negative market cycle like it’s massive genuine sales event!
When markets are down, everyone is panicking and selling, this is when you pick up the phone to your Financial Planner/Adviser and say “right, what should I be buying, I want to buy investments that are a bargain?”.