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As we write this, the global markets are still in a period of great uncertainty. Even as European nations tentatively begin reopening their schools and business, COVID-19 still hangs over the economy and stock exchanges. Many investors, already bruised from 30% market falls in the first quarter of 2020, are looking ahead with trepidation, wondering if things will get better. If they do not, moreover, how can an investor muster the mental fortitude to stay true to the investment strategy they agreed with their financial adviser?
In this article, our Oxfordshire financial planning team here at WMM offers some thoughts on how to combat the harmful effects of fear and bias when it comes to investing. We hope you find this content helpful. Please get in touch to join our mailing list for the latest updates, or request a free consultation if you’d like to discuss your own investment planning needs with a member of our team: 01869 331469.
#1 Identify loss aversion
One of the biggest psychological forces faced by an investor is the fear of loss. This becomes even more intense during a down-market such as Q1 2020, since investors feel that they have “lost already” and do not want to lose anymore. Loss aversion is a powerful human instinct from our primordial days as a species. It is useful for survival, but not always for investing.
Battle fear of loss with two important truths. Firstly, recognise that you haven’t “lost anything” until you pull your money from the markets. Until then, your declining stocks are not yet crystallised. Second, check the fundamentals of your stocks and funds with your financial adviser. Unless these are on shaky ground, they remain valid investments. Don’t make the mistake of turning a fall into a loss!
#2 Be wary of the bandwagon
Human beings are, in a sense, “pack animals”. We like to feel that we belong within a group and not stand out too much. Again, this is helpful in a primordial environment but not necessarily for an individual’s investment strategy. When we see media claiming other investors are flooding to oil, gold or other assets during a down market, it’s often difficult to not simply follow the crowd.
Battle this bias by simply recognising two important facts. Firstly, no one else needs to know about your investment decisions! That alone can remove a lot of fear of being viewed as an “outlier investor”. Secondly, the crowd is often wrong. For an example of that, just look at the Dot Com Bubble in the 1990s, where excessive speculation in technology companies came to a head in October 2002.
#3 Beware of ‘recency’ bias
Another interesting part of human psychology is our tendency to believe that the near future will mirror the recent past. If the stock market has recently gone down, for instance, then investors will often assume that the gloom will continue. Conversely, in early January 2020 few people anticipated that the 11-year global bull run would imminently and dramatically end.
This bias towards recent events is both common and understandable amongst investors, yet it is not reliable. As we all navigate through the impact of COVID-19 upon the stock markets in Q2 of 2020, it’s crucial to not simply assume that trends will inevitably continue. Making such assumptions can lead to trying to time the market, which is difficult even for seasoned investment professionals to do consistently.
There are many other investor fears and biases that we could talk about. Here, we hope our financial planning team have been able to help inform your thinking about how best to approach your own portfolio during these challenging times.
If you are interested in starting a conversation about your financial or investment plan, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our friendly team here at WMM.
Call us on : 01869 331469