In my 25 years of financial advisement, I’ve seen a lot of situations where people get in in the way of their own goals. How? Through their preconceived notions of investment. So today I’d like to share with you the top five investment biases that could be causing you to fall short of your financial goals.
Cognitive Bias. People with cognitive bias are often more aggressive with their financial decisions as a result of someone else’s beliefs. Let’s say your family has only used money markets or CDs and has avoided the stock market—how has that affected your decisions? If your parents liked to gamble, do you find yourself more willing to make high-stakes investments? Another’s footsteps may not lead down the path that works best for you.
Confirmation Bias. People with confirmation bias tend to interpret information according to preexisting beliefs. If someone believes the stock market will be going down in the near future, they’ll tend to look for media outlets that confirm that belief. Everyone wants people on their side, so when an individual finds information that agrees with personal ideas, it validates them.
Recency Bias. People with recency bias compare things to recent occurrences, often ignoring what has happened in the past or what could happen in the future. As an example, think back to when the dot-com bubble burst in 2000, causing the stock market to fall about 50%. Then, seven years later, it fell another 50%. When 2014 rolled around, people thought the stock market would fall again because it had done so in the two previous seven-year cycles. They were looking at something that happened recently instead of at the big picture—what’s happened over the last 100 years, for example.
Home Bias. People with home bias only invest in their own country’s stock market: Americans invest in American stocks, Europeans invest in European stocks, and so on. This can even happen in regard to your company’s stock; if you work there and see it every day, you may end up with too much of your company in your portfolio.
Action Bias. People with action bias only see value with action, so they may constantly be doing things to see their stock portfolio grow. This happens a lot during times of market volatility. However, the most positive results tend to happen when we don’t interfere and instead let compounding take effect over the long term.
If you have any questions or need more information, feel free to reach out to me. I look forward to hearing from you soon.