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Good investment habits versus damaging biases

In a low-interest, lower-return, more-volatile investment environment, investors have an even greater incentive to keep wealth-damaging behavioural traits or biases under control.

 

 

Individual investors have no control, of course, on the emotions of other investors or the overall state of investment markets. However, you can try to keep your emotions in check when making investment decisions.

And it is under your control to create and stick to an appropriately-diversified portfolio, set achievable long-term goals and have realistic expectations for returns. A disciplined investor guided by a solid financial plan is less likely to allow emotions to get in the way of investment success.

Here are seven of the undesirable traits that behavioural economists generally say investors should avoid:

Overconfidence

Many investors have an unjustifiable confidence in their ability to make smart investment decisions. Overconfident investors often believe they can pick future winning investments and somehow beat the market.

This overconfidence typically leads to frequently buying and selling shares in a chase for winners and being overly optimistic about the future performance of chosen investments.

Loss aversion

An excessive aversion to loss can make investors unreasonably sensitive to investment losses. Such investors tend to sell their winning investments while holding on to losers that are unlikely to recover.
And loss aversion can lead to investors being unwilling to take appropriate investment risks – potentially lowering long-term returns.

Regret

Excessively dwelling on past losses can lead to investors focusing too much on part of their portfolio rather than the portfolio as a whole. This trait, also known as "narrow framing", can hinder an investor’s efforts to have a properly-diversified, long-term portfolio and make them more sensitive to short-term market movements.

Inertia

Inertia tends to get in the way of beginning to seriously save, saving more whenever possible and developing a long-term financial plan.

Fear and greed

These are the terrible twins of becoming fearful when markets are falling and becoming greedy when markets are rising. Fear and greed often lead to selling shares after prices have sharply fallen, only to buy after prices have sharply risen.

Comfort in crowd-following

Investors often gain a false sense of security by following the investment crowd. As with fear and greed, this usually results in jumping in and out of the markets at the wrong times.

Confirmation bias

This involves deciding on a course of action and then looking around for evidence to support that action while blocking out contrary opinions and research.

As part of your efforts to keep damaging traits or biases in check, try to block out investment "noise" – the abundance of often-conflicting and misleading information facing investors.

Make the most of investment compounding to magnify your long-term returns. (Compounding occurs as returns are earned on past returns as well as your original investment.) Recognising the rewards of compounding can help investors to stay focussed on the long term.

And think about ways to beat investment inertia including putting yourself into a form of saving "autopilot" by making higher salary-sacrificed super contributions.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
25 June 2019
vanguardinvestments.com.au

 


Sam El Shammaa

Sam El Shammaa

Director/Financial Planner

For more than 20 years, Sam has been a financial planner helping individuals and families achieve their financial planning goals, by providing advice on Investment Planning; Insurance Planning; Tax Planning; Retirement Planning; and Estate Planning. Working with a network of highly skilled professionals in Sydney he is dedicated to providing high-quality advice and integrated wealth management solutions that simplify and enhance the quality of his clients' lives.

Sam established his own firm in 1997 and has overseen its steady development and growth. Attention to detail, good listening skills and great empathy are symbols of his appreciation by his clients. He has built long-term relationships with his growing client base and aims to provide excellent customer service.

Sam began his financial planning career in 1993 after completing a Bachelor of Science degree in 1991. Since this time he has accumulated many professional qualifications such as:

Sam has volunteered with the Cancer Council of NSW and can be seen almost every year volunteering or participating in the 7 bridges walk.

Away from the business, he enjoys spending weekends with his son. He is also a football (soccer) tragic and is a massive Chelsea FC fan.



George Pereira

George Pereira

Financial Planner

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George has been awarded a Masters of Commerce (Financial Planning) and a Bachelor of Commerce through University of Western Sydney as well as having the Diploma of Financial Services (Financial Planning).


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Jane entered the financial services industry in 2006, and worked with big blue-chip financial companies such as Count Financial Limited and AMP Financial Planning Pty Ltd.

She holds a Master's degree in Applied Finance through Macquarie University, and she is a member of the Million Dollar Round Table.

Being a self-confessed "tennis nut", Jane spends many weeknights in the tennis court, and is a frequent member of Sydney's Eastern Suburbs Tennis Competition.

Being a highly motivated professional, Jane is always eager to help her clients on a wide range of financial planning needs.

Paul Jayashekar

Paul Jayashekar

Financial Planner

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He provides a holistic approach on various aspects of financial advice encompassing areas such as Investment Planning; Insurance Planning; Tax Planning; Retirement Planning and has extensive experience and knowledge in these fields.

Paul's professional qualifications are:

Away from his professional life, he enjoys spending his time with his family doing various activities such as coaching his son and taking him to games. He is a very avid sports fan and a cricket enthusiast.

Christian Tanadinata

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Client Services Manager

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He holds a Master's degree in Commerce specialising in Marketing through the University of New South Wales.

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Administration Assistant

Jenny is a University of New South Wales graduate who joined the team as an Administration Assistant. She is keen to put her customer service and organisational skills to use, making sure day to day operations run as smoothly as possible.

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