Driven more by emotion than sound advice and logical decision-making, many people make bad investment decisions, which not only cost them money, but often also lead to further bad decisions as they try to recover their losses.
David Andrews, a portfolio consultant at Franklin Templeton Investments, says the market meltdown triggered in 2008 by the global financial crisis left a legacy of pessimism that continues to rule the minds of many investors despite subsequent periods of both economic and market recovery.
“While some investors remain on the sidelines frozen by indecision, others seem to shift between asset classes with every mood-changing headline,” he says. “Paradoxically, investors tend to view market volatility as an isolated phenomenon, not realizing that their own fears, multiplied by those of countless other investors, may help fuel the turbulence.”
It takes discipline and the recognition by investors that they may need help to get an investing strategy back on track, adds Mr. Andrews. He suggests a four-point approach:
WORK WITH A QUALIFIED FINANCIAL ADVISER
They are trained to recognize biases – their own and their clients’. Their understanding of portfolio analysis and the markets is supported by sophisticated technology that helps overcome bias and other emotional shortcomings. A recent Franklin Templeton Investments survey of investors around the world reported that about two-thirds of respondents believe advice from a financial professional is important when making equity purchase and sell decisions.
Investors need to know themselves; their understanding of the capital markets, panic points, risk tolerance levels and whether they are overly confident or cautious.
HAVE AN INVESTMENT PLAN
The decision-making process is heavily influenced by past experience, so the most critical first step is a carefully considered investment plan. Studies show that investors who follow a written plan are typically more successful and more satisfied with their investments.
TAKE TIME TO MAKE DECISIONS
Split-second investment decisions are almost always wrong. Although professional investors like portfolio managers must often move quickly on a trade or tactical strategy, each action is supported by endless hours of analysis and debate. Portfolio managers may track securities for years before all their criteria are met and the price is right.
“Consciously resolving to think differently about investment decisions can lead to creative solutions,” says Mr. Andrews. “For example, behavioural finance experiments have determined that while cutting immediate consumption is painful, sacrificing future consumption is much less so.
“Those who struggle to save money for investment purposes are more likely to adhere to a plan by creating a savings program that increases over time – say from five per cent to 10 per cent of gross income over a five-year period – rather than one that immediately requires eight per cent of monthly income.”