Uncovering biases can reduce investing mistakes

It's important to recognize that behavioral biases often play a role when investors make decisions based on emotions and psychological factors rather than on rational analysis and objective data. Some common biases that can affect investing decisions include:

1. Overconfidence bias: causes investors to believe they have more information or skill than they truthfully do, leading to overly optimistic investment decisions.

2. Confirmation bias: causes investors to seek out information that confirms their pre-existing beliefs, rather than considering all available information.

3. Loss aversion bias: causes investors to be more sensitive to losses than to gains, leading them to make overly conservative investment decisions.

4. Herding bias: causes investors to follow the actions of a larger group, even if it goes against their own best interests.

Biases may show up as FOMO – Fear Of Missing Out when a particular investment or sector is surging. They may show as a heightened fear of market corrections despite the fact their portfolio has a 30-year time horizon. Some investors might only be drawn to articles that talk about a looming collapse which prevents them from having any investments that could perform well if they are incorrect and markets rebound.

For individuals who are managing their own investments, becoming aware of the common biases may help them avoid some costly mistakes.

For our clients, we manage money on a discretionary basis. This helps by providing an objective perspective and a diversified investment process to see them through challenging times. Occasionally media “noise” may still cause uncertainty for some clients, but most recognize that risk management is an important part of our process and that we are actively seeking ways to grow their net worth while protecting for a variety of possible negative scenarios.

Biases are a natural part of the human decision-making process, but a clear investment process that factors in diverse viewpoints should increase the likelihood of success.