Suffering from biased investing?
Adrian Mastracci, Senior Portfolio Manager at Lycos Asset Management
Our investment behaviour is dramatically influenced by the bias we keep. Left unchecked, bias can inflict long-lasting portfolio implications, such as lower returns. The goal is to become better aware of how bias affects the outcomes of investing behaviour.
Bias has many definitions, such as, “a preference or an inclination, especially one that inhibits impartial judgement.” Nobody is immune from investing bias. Thankfully, the wiring is easily changed.
I highlight some important biases for you to recognize:
Over-confidence bias: The most common investor bias by far is over-confidence. That is, believing we are more savvy investors than we actually are. Over-confidence often leads to quick decisions that we regret. Such as investing too much in “surefire” stocks.
Confirmation bias: Investors have built-in desires to find information, trends, people and institutions that agree with their existing views. The next step is to ignore all the other people and data that contradict existing beliefs and positions.
Recency bias: Your next investment decision can be unduly influenced by the outcome of your last trade. You are more receptive to investing if you just realized a gain, versus a loss.
Home bias: Americans typically have too much of their portfolios in US stocks. Europeans load up on their home country favourites. Similarly, Canadians invest too much in Canada. Home bias is a global investing conundrum sporting no favourites.
Loss-aversion bias: Too many investors have a flavour of loss-aversion bias, also known as denial bias. That is, the refusal to sell a losing stock until its price returns close to breakeven. Selling at a loss is an admission of failure. Three little words ease the pain, “I was wrong.”
Over-reaction bias: Investors often go overboard both on the upside and downside. Nobody likes to admit it, but practically everyone has jumped onto an investing bandwagon near or at the top. Similarly, many also jumped off near or at the bottom.
Recognize your patterns of bias then muster up the resolve to make lasting changes. You want to regain that impartial judgment, without regrets. No could’ve, should’ve or would’ve need apply.
Markets are logical and rational. Investors are driven by emotional attachments. This posting only scratches the bias surface.
Any one bias can cause portfolio havoc. I’m asking you to replace those well-entrenched emotional connections with logical and rational decisions.
Your investing habits will improve.