Considering the current market situation, have you been tempted to tinker with investments?
Given the volatility experienced over the last few weeks due to the global coronavirus pandemic, it’s natural to wonder if you should be adjusting. Investment values may have experienced falls as countries lockdown and get to grips with the virus. But for most investors, sticking with a long-term plan, which considered periods of volatility and downturn, is the best course of action.
Keeping the long term in mind is something we often say when it comes to investing, but that can be easier said than done. Financial bias can creep in and mean that we’re more likely to make decisions that could do more harm than good. These mistakes could end up costing you in the long run.
Financial bias amid market volatility
Financial bias affects your ability to make decisions based on factors other than facts and evidence. There are many ways financial bias can impact on investment decisions. Amid market volatility, you could be influenced by these three types of financial bias, for example.
1. Groupthink
Groupthink is a bit like jumping on the bandwagon. Among the current uncertainty, perhaps you’ve heard friends speaking about moving their assets into cash. Some may even have suggested that now is the perfect time to buy more stocks and shares. If you see lots of others following the same path, it’s easy to think you’re going to miss an opportunity unless you follow suit. So, you may be tempted to do so.
However, financial and lifestyle goals differ enormously. What suits one person could be a mistake for you. Without context, it can be difficult to understand if what everyone appears to be doing matches your goals. Don’t follow the lead of others, make sure your investment decisions are based on what you want to achieve and your circumstances.
2. Information bias
How many news reports have you seen about the recent market volatility? It’s made headlines around the world and you’ve no doubt spoken about it too. Having access to information certainly isn’t a bad thing, but in the modern world, it can be unrelenting. Trying to filter what you should and shouldn’t listen to is challenging.
This is where a financial plan can help. Knowing what you hope to achieve with investment can help you tune out some of the noise that could lead to financial bias. For many investors with a long-term goal, this burst of volatility is unlikely to have an impact in the grand scheme of things. So, whilst difficult, largely ignoring the media stories focussing on daily movements can be useful.
3. Confirmation bias
Whilst we’re on the topic of information, confirmation bias can affect many of us. We formulate opinions on numerous subjects, even before we’ve fully researched them. It can help us make quick decisions, but it can also mean we don’t fully assess the evidence and facts in front of us.
Confirmation bias means actively seeking out and focussing on data that supports your existing beliefs. And with so much information available online, it’s near impossible not to find something that backs up your conclusions. The downside is that it can mean you dismiss evidence that goes against your opinion. You may have decided that you should adjust your portfolio to a lower risk profile given the current market volatility, for example, ignoring the historic evidence that suggests markets recover over the long term.
Overcoming financial bias
So, what can you do to overcome financial bias and base your decisions on facts and evidence? The good news is that recognising the impact financial bias can have is the first step, so you’re already part of the way there.
The key things to keep in mind to overcome financial bias is that your plan should be personalised to your goals and be put together with a long-term perspective in mind. As a result, it’s a plan that should serve you well if you stick to it. Making rash decisions in response to short-term market conditions could derail what you’ve set in place.
Working with a financial planner can also help. We’re here to offer you a different perspective of looking at your finances as well as providing solutions. If you’re thinking of making an investment adjustment, having a professional to explain concerns and goals to, can help ensure you stay on the right track.
When should you change your investment plans?
Of course, there are times when changing your investment plans or readjusting your portfolio is appropriate.
However, this typically shouldn’t be in response to short-term movements within markets. Instead, these decisions should be centred on your goals, aspirations, and current financial situation. So, if your income net wealth has increased, it may be appropriate to adjust your risk profile, or you may adjust investments if you now intend to draw an income from them earlier than expected. It’s a step that should be taken after weighing up the pros and cons, not as a knee-jerk reaction.
If you’d like to discuss your investments and how they’re performing under the current circumstances, please contact us.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
