The Biases Impacting Our Investment Decisions

Written by: Michelle Arpin Begina, CFP®, CIMA® | Snowden Lane 

As we continue to work through this difficult period of uncertainty and volatility in market, there are many voices telling investors to stay-the-course. They echo the notion that now isn’t the time to panic and that COVID-19’s impact is and will be similar to past events. While it may be easy for us to compare this situation to previous ones and tell ourselves everything is business-as-usual, the fact is that no one knows what comes next. For this reason, investors should refrain from writing-off this (hopefully once in a generation) event. The next 90 days could impact the next 10 years, so being proactive and making unbiased decisions now can help positively protect your assets for the future.

Manage Your Confidence

If you Google “confidence,” you find any number of lists that are more or less showing you how to overcome vulnerability. But what if that vulnerability is confidence? Many investors are understandably fearful of taking any action right now, while others refrain from making changes because they are overconfident in their plan. Regardless of which side they fall on, investors need to avoid letting their confidence level bias their decisions by remembering that it’s okay to adjust their portfolio even in a volatile market. In the context of whatever makes sense for a given circumstance or individual risk tolerance, a simple example is the strategic decrease in equity exposure. Similarly, even if an investor feels their plan is all but crisis proof, it doesn’t hurt to take a beat and make sure that is actually the case.    

Another mistake some investors are making with COVID-19 and the current volatility is explaining it away as just another market downturn, similar to the one we experienced in 2007 – 2008. These types of people often feel overconfident because they tell themselves they were fine back then, and therefore they have no reason to worry or take any action now. After all, from March 2009, the S&P 500 is up 1,900 points, representing a 272% increase since that period.

Don’t Drop Your Anchor

While a market downturn like the one we’re experiencing (the Dow Jones Industrial Average and the S&P 500 have rallied more than 15% over the last week, but are still down nearly 20% from their February levels as of March 31, 2020) may resemble previous ones, the economy and financial markets today are different from anything most investors have previously lived through. This means that if an investor is making a financial decision today based only on what they experienced post Financial Crisis, they could hurt themselves because the decision is rooted in our innate “anchoring” bias. This is the tendency we all have to make decisions based on an initial experience. It’s difficult for most of us to avoid because it’s typically something we do subconsciously, but if an investor recognizes it and approaches each financial decision with the understanding that it exists, they can begin to address it.

Making meaningful changes also means having the right information and one of the things investors are flooded with right now are frantic short-term headlines in the media. While market information is always going to be useful, many of the short-term outlook stories and headlines we see on the major networks are ultimately not going to be helpful for anyone trying to make significant forward-looking financial decisions. Most investors know that it’s nearly impossible to predict market activity. Instead, investors should turn to the things that they can measure and track, such as the amount of risk in their portfolios. Investors can control and alter their risk exposure at any time, and depending on their tolerance, they can use it to make informed decisions for their financial future, which will be more dependable then any chart or graph on TV.

None of us know how long this current period of volatility will go on for and it doesn’t look like the market is going to enter a recovery anytime soon. So, regardless whether you are an investor who feels confident or concerned about what this volatility means for you, keep in mind the biases that could be impacting your view and then don’t be afraid to make meaningful changes to your portfolio. What you do now could make all the difference in protecting your assets in the long run.

Related: The Most Successful Investors Share Two Characteristics