Be aware of biases

As the curve continues to flatten and as states around Australia begin to ease lockdown restrictions, many might be wondering what life will look like “on the other side” of the COVID-19 crisis.

Restarting economies after they have been in hibernation will surely be no small feat for governments and it will take a coordinated social effort over time to get businesses back on their feet, people back into their jobs and for some sense of normality to return.

In the last few months, investors around the world have certainly had their resolve tested given the wild market swings and portfolio fluctuations.

We’ve written recently on the perils of recency bias and loss aversion, but perhaps there are also a few other behavioural biases to be aware of as you begin to emerge from your own investing

The use (or misuse) of information

With the amount of readily available market information out there, and the speed at with which they change, it’s sometimes difficult to process it all to inform a rational decision.

Some have even termed the amount of information (and misinformation) out there about COVID-19 as an “infodemic”.

When this happens, we can easily fall into the trap of seeking information that supports what we already believe in. This is known as confirmation bias, and may lead us to place more emphasis on information we are familiar with and to ignore information that’s new or contradictory.

If you are of the view that markets will rebound sharply and follow a perfect V-shaped recovery, you might not even realise you are filtering out data that might suggests otherwise.

Conversely, this also applies if you are particularly pessimistic on global efforts to contain the spread, or perhaps have a lack of faith in those in charge to make the right economic decisions.

Remaining impartial in what is a highly emotional situation is perhaps impossible, but just being able to acknowledge when you might be favouring one perspective or source over another can still help lessen confirmation bias, and ultimately contribute to more sound decision making.

It’s also worth remembering that the situation is still fluid, and meaningful economic indicators are still emerging. While there is credible research and economic modelling out there, it’d stand you in good stead to adopt a sense of flexibility and willingness to adapt or rebalance as more concrete information becomes available (but all the while remembering your long-term investment goals!).

The comfort of crowds

There is a certain sense of comfort when you are part of a crowd, and when it comes to unprecedented times like these, doing what others are (on mass) doing seems safer than sounding out your own judgement. By taking this shortcut, it’s also arguably less mentally straining than figuring it out yourself.

We are more prone to “herding” behaviour when we face difficult decisions or uncertainty. If others we know are cashing out as a precaution, doing the same can be tempting even if it’s not the best investment decision for your own situation.

Likewise, as we start the journey towards economic recovery, you might be hearing people say it’s now the best time to buy as shares are at a discount. But consider if these “cheap buys” will throw your pre-determined asset allocation into disarray or if it means ignoring costs or tax implications.

Just because everyone else is doing something doesn’t necessarily mean it’s the right course of action for you even if you fear you are missing out. If this is the case, it might prove useful to consult your financial adviser.

Conclusion

These are just two behavioural biases worth acknowledging as we continue to adapt to the evolving COVID-19 crisis.

The challenge with biases is that they are deep-seated aspects of our decision making process and are often difficult to spot as they play out so naturally. While perhaps we cannot cure them completely, we can however mitigate.

Just being aware of behavioural biases is a good place to start. Additionally, focusing on the investment factors we can control is another. This means tuning out the noise and sticking to your investment plan even when those around you might not be.

 

Please contact us on 07 5444 0675 if you seek further assistance on this topic.

Source : Vanguard May 2020

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

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