Understanding how you can help or hinder your investment success
Our strategy is based on a simple premise: the best way to achieve long-term investment growth is to establish a sound financial plan underpinned by some fundamental principles, and to stick with it.
This is how we help you achieve financial freedom.
However, there are all kinds of understandable impulses that can tempt you off course. Being aware of them helps you – and us – to guard against them.
We will help get your financial house in order, but then it’s up to all of us to keep it that way. Staying the course works, but its easier said than done. Trust us, this takes discipline!
Chopping and changing your investment strategy in response to the latest economic news spells trouble for your returns. Trying to second-guess the market is very rarely a route to success.
Confidence in a proven strategy is one thing. Overconfidence in an ability to choose the best investments is another. People tend to exaggerate their talents and underestimate the likelihood of bad outcomes over which they have no control. Investors with too much confidence often trade too much. Remember that those who switch their investment strategy may be more likely to receive lower returns over time.
Losing money hurts and behavioural finance suggests that some investors are more sensitive to losses than to risk and return. Some estimate that people weigh losses twice as much as potential gains.
‘Anchoring’ means focusing on a particular price and giving it greater significance than it should have. People often anchor on the price they paid for an investment and base future decisions on that price. However, this can prove costly. All that matters is what it is worth today.
Following the herd
Everyone may be doing it, but that is no reason to follow. Keep this principle in mind and you will avoid being unduly hurt by the natural human tendency to think that if lots of people are doing something, you need to do the same.
The human desire to avoid regret can lead to inertia. Inertia can act as a barrier to effective financial planning, stopping people from saving and making necessary changes to their portfolios.
The endowment effect is the phrase used by behavioural finance to describe an almost universal tendency to overvalue those things that we own. This is demonstrated in investing by holding on to to an underperforming investment in the hope that it will recover. People who inherit shares of stock from deceased relatives exhibit the endowment effect by refusing to sell those shares, even if they do not fit with their risk tolerance or investment goals, and holding on to them may negatively impact their portfolio’s diversification.