Emotions and gut reactions often rule our investment decisions, which can be extremely detrimental to our portfolio and our long-term investment goals, said Dave Fishwick, head of macro and equities investment at M&G. Fishwick was speaking at the sixth annual Morningstar Investment Conference in London, where he laid out some strategies for investors to avoid emotional decisions in favour of more logical, reasoned decisions.
As humans, we all crave certainty, he said. But the truth is, we are living in a highly uncertain world where disasters occur and markets gyrate wildly. “The reality is life is deeply deeply uncertain. But we crave certainty. We want answers,” he said. This need for certainty and answers leads investors to put unwarranted faith in market “experts”, said Fishwick. “We are always very tempted to believe that someone can provide an answer... we are drawn to people who have answers.” In particular, Fishwick said studies have shown that people are more willing to listen and less likely to think when they hear from a professional-looking “expert,” which can lead them to make poor investment decisions.
Following the herd is also a problem when it comes to investing, he said. People may make an investment based on what everyone else is doing, but it could be that everyone else is wrong, he said. Evolutionarily, we care more about what people think and avoiding isolation than being right, he said.
Listening to the experts and following the herd can keep us from making rational, logical and suitable investment decisions, said Fishwick.
The initial step to solving this problem involves recognising these cognitive issues in the first place, he said. Recognise that experts cannot be 100% accurate when predicting the future. Recognise that following the herd is a deeply ingrained survival tactic, he said. Simply recognising these issues will help you as you try to make rational investment decisions, he said.
Furthermore, Fishwick recommends that when people choose to make an investment, they should write out some notes to themselves exploring how they will feel and react in worst case scenarios. He calls this “emotional preparation”. For example, Fishwick says he writes notes to himself asking: ‘If you plan to buy a stock and it drops by 15%, would you still hold onto this investment and not waver in your decision? Would you buy a larger stake in this company because of your conviction?’ This emotional preparation helps with your investment decisions, he said.
While Fishwick concedes that investors will always struggle with emotional investment decisions and reactions, at least being aware of these cognitive and behavioural issues will help investors work towards making more rational choices.
