I recently attended an information session hosted by BMO fund manager and star of BNN, Larry Berman. He spoke about the emotions of investing and how most people, even professional fund managers are guilty of the psychological mistake of emotional investing. He spoke about creating a system, and not letting our own human psyche to get in the way of our investment strategy. He stated that there are 4 key mistakes that most people make when investing.
1) Anchoring- Anchoring is when people are hitched to an idea, or sector and not willing to change from this strategy. This is a massive emotional mistake in investing, and usually is heard with comments such as “this will never go down” or “it has always been a big return”. Think real estate investing in Vancouver. The market has not gone down in several years and double digit returns seem to be the norm, but this market is also linked to the laws of supply and demand, and can face a correction.
2) Hindsight- We all can look back and say hindsight is 20/20. We feel, the key word is feel that we should have known that something was going to go up or down in returns.
3) Loss aversion- this is a common mistake to continue to hold investments that haven’t moved or paid a return for several years. At some point, there needs to be a decision to sell, perhaps take a tax loss etc.
4) Representative Bias- This is where we all chase returns, such as real estate, oil, gold, precious metals. Or even countries returns. Ever remember hearing the emerging markets and BRIC countries.
As with anything, a financial planner needs to take all aspects into consideration when making recommendations. A big part of my job is to take the emotions out of the planning. I once learned that the real job of a financial planner is “constructive behaviour modification”. We need to eliminate these psychological mistakes from our planning and look at the larger overall picture, including taxation, estate planning, charitable donations, family dynamics etc. If we continue to make the same decisions over and over and expect different results, well where does that lead us?