I was amused to be sent an article originally published on The Spectator website entitled “The real point of a financial adviser is to save you from yourself”. In the article, the author, Louise Cooper, compares financial advisers to personal trainers, “Losing weight or keeping fit requires the same self-discipline as saving”. (Please read the original article at http://www.spectator.co.uk/spectator-money/spectator-money-columnists/9456832/the-real-point-of-a-financial-adviser-is-to-save-you-from-yourself/)
All of us have behavioural biases and traits that will affect how we view and manage long term investments. Many of these traits can be extremely harmful and will undermine any investment success over the longer term. These have been classified and explained as:-
Overconfidence; the trait of unmerited confidence in one’s own ability; remember the DotComm Bubble, (1995-2000), the Wall Street Crash following the Twenties Stock Market Bubble, (1922-1929), Railway Mania, (1840s), South Sea Company,(1720) and Tulip Bulb Mania, (to 1637). The good times do not last forever and you need to manage the downside!
Prospect Theory/Loss Aversion; not regarding gains and losses on an equivalent basis. Our brains are designed to give priority to bad news as a survival strategy. This can give rise to three potential effects; the Disposition Effect, where you sell winners too soon and hang on to losers too long; the House-Money effect, where big winners get too aggressive; and the Snake-Bite Effect, where losers go too conservative too quickly.
Mental Accounting; separating money into separate pots and not optimising risk across the full value of the pots.
The Framing Effect; being overly influenced by how something is presented, rather than what is actually going on. Framing leads to people concentrating on the performance of individual stocks or funds rather than the portfolio as a whole or considering performance over too short a period.
Anchoring; focussing too heavily on a reference point and reacting to that, rather than the world as a whole. The FTSE not rising above 7000 perhaps, or that an old share cost £2.50 each and not being prepared to sell for less.
Recency/Availability Bias; an over-reliance on recent decisions or new information.
Confirmation Bias; only finding and relying on information that supports a decision you have already made. Seeing a particular car more often, once you have bought the same model is an example of this bias.
Representativeness Bias; judging events by how they appear rather than how likely they are according to the rules of probability. The Gamblers’ Fallacy is a classic example of this; spin a coin 20 times and get heads each time suggest you are due a tails, but the odds remain 1:2.
Ambiguity Bias; avoiding the unknown, by falsely connecting familiarity with low risk. Just because you own a house and live in it does not make Buy-to-Let property low risk!
Herding; doing what everyone else does! Buying gold because your neighbour, hairdresser and taxi driver have is not necessarily a good idea. You have probably missed the boat!
Hyperbolic Discounting; valuing income now much, much higher than income later. This can often result in selling too quickly or trading too much.
If you are into day trading of stocks and shares, you really don’t need me, you need a stockbroker and deep pockets if things go wrong. If you want to make the best of risk and reward over a longer period then you either need me to plan your portfolio from beginning to end or you need me to act as a coach to ensure you don’t take any accidental short cuts. If you want to do your cash ISAs and your emergency fund deposit accounts, then be my guest; ask me to concentrate on non-cash investment products and making the best of the tax regime.
One of the hardest things to make sense of is the invention of new and the removal of old products over time. Unless you are willing to make it your life’s work, keeping track is likely to be almost impossible for one individual. As an IFA, I can rely on research by others and my regular CPD, (Continuous Professional Development), to keep me up to date and relevant.
If you are happy running your investment portfolio, say stocks and shares ISAs or directly owned shares, then I am happy to concentrate on making the best of your other assets and making sure you are able to take advantage of structural changes in the marketplace. As a touchstone, have you thought of ETFs? ETCs? Investment Platforms? VCTs? Scheme pensions?
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.