Behavioural Investing: Sticking With The Plan
Updated: May 2
I have recently spent some time thinking about how people react to the markets and the media’s portrayal of what is happening out there. This led me to research some articles about the topic of Behavioural Investing. Following are some of the key points which resonated with me and that seemed to be applicable to many people.
For better results, Investors should stick to their plans!
In reality, we know that from time to time the market will suffer unexpected dips and also benefit from unexplainable spikes. It is the response to these fluctuations which really makes an impact. The ability to remain focused and stick with the plan can make a real difference.
Realizing a healthy long-term return requires the assumption of different types of risk, one of which is volatility - or the up and down fluctuations in price. While the historical long-term stock market return averaged around the 10% mark, the results in any given month, quarter, or year can deviate from the average significantly.
Avoid being swayed by the endless stream of information from the media tracking the market’s ups and downs— and resist the temptation to let emotion drive you from your plan for success.
Don’t mistake the 24-hour news cycle with prudent, personal investment advice, or the financial plan made for you. The goal of the media is to get your attention and it is often considered more entertainment than fact. Things are rarely as good, or as bad, as the media portrays them, and while fear is the enemy of an investor, it is a headline writer’s best friend.
The reality is that you cannot control what various markets will do next; however you can manage your thoughts and actions. Understanding how we make decisions and bypassing the traps our minds fall into, helps avoid mistakes and makes achieving our goals much easier. Often the path to success is navigated not by making brilliant moves, but by avoiding the obvious potholes, and taking a path similar to a train ride instead of a rollercoaster.
Resist checking your account balance too often. If the daily stream of news makes you nervous then turn it off. The field of behavioural investing is not new, but employing its core tenets is gaining favour among investors, advisors, and plan sponsors, who recognize its value in influencing sound financial decisions.
People make instinctive decisions every day, but it can be difficult to know which are correct. And if an instinctive decision turns out to be a mistake, it can have significant negative consequences - a result often painfully clear when the decision concerns your finances.
The importance of behavioural investing is to find ways to help people avoid the cognitive illusions, biases, and intuition that lead to irrational decisions. Investors obviously aren’t trying to make poor decisions, but they can be swayed by emotion, especially when the road gets bumpy. When emotion bubbles up it is important to maintain perspective.
Even the most disciplined, savvy investors can be tempted to go with the crowd, or to act on a hunch, especially during downturns, or periods of volatility. Create and maintain an overall financial and wealth plan and stick to it.
Financial plans often include Monte Carlo analysis, which takes into consideration the potential bumps along the way. This allows for flexibility within the parameters of a financial plan and helps avoid making decisions based on emotion. These plans are not set in stone, but they can prove helpful if an investor begins to doubt his or her long-term strategy. A written plan provides a roadmap when the emotion of intuition takes hold.
Financial plans help to take the emotion out of investing and should be evaluated over full market cycles, not short time-frames. Investing for a lifetime certainly involves some stress, but a smart investor uses timetested tools to combat the emotions of fear and greed.