Updated: Mar 30
What are some key behaviors that investors often have? And this is based on various different research studies that have come out that are important think about. If you if you think about your own behavior as an investor, what are some common themes?
Number one overconfidence and this is a human tendency, it's natural to overrate one's ability to select winning investments. I consistently hear from those that I know that manage their own portfolios of individual stocks. I can tell you their excitement and their willingness to share their information is very much linked to when they're doing well. And those are the times when confidence is the highest and their most likely to make an investment decision.
And again, these people behaviors are an important consideration and thinking about an investment plan as ultimately, or an investment structure as it ultimately will lead to decisions that perhaps are suboptimal.
Loss aversion is and other studies have shown that losses caused about twice as much pain as gains cause pleasure. Is that practical and helpful in investment decision making it's my personal belief that no, that the idea that trying to avoid a loss is, is probably a suboptimal way to think about a portfolio. It's better to build a structure in a portfolio that is diversified to the point where a single loss in an individual security is de minimis and its potential impact to the portfolio. Thus, by the structural nature, you now avoid having to deal with this behavior. fear of loss aversion.
The biggest and most impactful behavior that I see and I really think that this leads to is the largest leader to sub optimal investment outcomes is chasing past performance. Abandoning an investment plan abandoning a well diversified portfolio, and repeatable process because something Bitcoin, Tesla stock, whatever it is, did really, really well yesterday. A lot of this is you know, very much emotion linked investing, investment decision making. There may be elements greed, there might be elements of fear that I'm missing out on this incredible opportunity.
Those decisions and these emotional and behavior linked decisions, or decisions that are focused really on what happened yesterday, I think are very much a sub optimal recipe for trying to manufacture positive and successful investment outcomes.
Lastly on this list is timing the idea that one can time the market time and investment time a sector. You know, there's one thing I've learned in investing over the last 20 years, it's that the underlying drivers in the short run to price are so complex and unpredictable, that the idea of trying to time them really isn't logical. There's so many factors. And this applies, you know, most acutely to an individual stock but even in the broader context of what might happen in the S&P 500 over the next 12 months. I would argue that at best trying to predict that as a coin flip, and if you're going to try to predict those sorts of things, you better revise those predictions as often as you can because you know you're going to be right if you do it often enough.
About WealthFactor: A Lake Oswego based investment adviser and wealth manager serving local high net worth and ultra-high net worth investors. Founded on the idea that high fees force unnecessary risks when providing investment advice. By leveraging the investment methodologies of the largest passive and rules-based asset managers, WealthFactor seeks to pass on the benefits that efficiency provides through financial technology on to its clients. WealthFactor offers custom investment advice services conveniently through separately managed accounts in each investor’s name. For more information visit www.wealth-factor.com.
About Bill Woodruff: WealthFactor’s founder has been investing in publicly traded financial markets for over 20 years. His career includes founding an alternative investment manager, launching and managing a mutual fund and serving as a managing director of a publicly traded investment manager. With over a decade of experience serving high net worth investors Bill skillsets uniquely blend an understanding of investor needs with an extensive background in financial markets and investing.