What if you made one investment mistake that wiped out a whole year’s worth of gains?
I’m reading a terrific book right now called “Same as Ever” by Morgan Housel. It includes a fair number of behavioral finance references, but the main thrust is that people tend to focus on what is going to change in the future. They almost never focus on what WON’T change in the future.
He uses a very apt quote from Jeff Bezos, Amazon founder, to illustrate this point:
“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible.“
― Jeff Bezos
When thinking about this idea in relation to investing, a basic truism comes to mind: irrational behavior persists – always has, always will.
Investors are still hardwired to want to “buy high and sell low.” What practitioners refer to as loss aversion is the result of human evolution, the impulse to protect ourselves. Investors feel the pain of losses more than the pleasure of gains.
Other investors get influenced by information that confirms their beliefs and often disregard information that conflicts with their beliefs. We call this confirmation bias, and those susceptible to it may put a disproportionate amount of money in various mental or physical accounts, which leads to an unbalanced asset allocation. And on and on.
If any of this sounds familiar, it’s important to understand that these biases are a normal part of human biology, and that they will not change on their own. But you CAN do something about them.
Working with an advisor who understands investor psychology, biases, and the dynamic complexity of your financial life is a great start. Tools like a detailed investment policy statement and periodic performance reports that include a snapshot of your asset allocation can also help mitigate the risks associated with behavioral biases. As advisors, much of what we do is help investors avoid mistakes that can cost them years (or decades) of hard-earned investment gains.
Contact us today to see how we can help you avoid costly investment mistakes and get personalized guidance tailored to your needs.
