The human brain is one of the most astonishing and powerful parts of the human body. It is responsible for virtually every movement and thought we make. Yet while the brain is truly a miracle and capable of so much, it is also the reason many of us struggle with investing. Studies would prove that left to our own devices, we are always and everywhere a failed investor.
The reality is, we human beings are naturally programmed to make mistakes financially due to some very notable cognitive biases.
The key to mitigating the effects of cognitive biases
First. know they exist. Next, understand what we can do to help avoid those common pitfalls. Perhaps the hardest part of this, in the world of investments, is that feelings and reality can often conflict at the same time. For example, we all know that when markets go down it is important to holdfast and/or buy more shares at the lower values. Yet when it happens, we all feel like doing the opposite.
Conversely, when markets are near all-time highs or surpass them, we know we should be reassessing our risk and rebalancing, but we all feel like buying more of whatever sector/investment has performed the best. The above example is intuitive objectively, but counterintuitive emotionally. This is what can make successful investing so difficult, and it is those very emotions that can take us off our path or even sink us, if we are not careful.
Emotionally panicking out of our investments
One of the most common pitfalls we can fall victim to is emotionally panicking out of our investments in more severe market downswings. While we all have emotional attachments to our money, decades of studies tell us we feel the impact of a loss to a much larger degree. The bias called loss aversion states that the pain of a loss is psychologically twice as powerful as any happiness we feel from a gain. That is a valuable fact to know, and we must use it to build strategies or processes around how we make investment decisions in times of market loss. The good news is we are here to help.
We're prone to these same biases, we specifically plan for it
At FORM Wealth, we not only accept that we too are prone to these same biases, we specifically plan for it. By building robust systems and processes around our investment models and trading strategies in TR Vest, we make decisions with merit, not emotion. This framework creates discipline and structure to only make changes when the confluence of our research dictates an adjustment. In an investment world filled with instant reaction and performance-chasing fads, this proactive and deliberate process helps to ensure even our personal biases or emotions are not allowed to permeate into our strategies. Perhaps never has this been more important than now with the line-up of stories making the rounds on the 24-hour news cycle we all live through.
We're here to lead you through these uncertain times
In closing, with all that is occurring economically, socially, and politically right now around the world, please know we are here to lead you through these uncertain times. While it has been a positive and relatively placid year in the markets to date, we may see volatility picking up speed later this summer and into the fall. When we do, please know we feel confident that in using our unique structures and wealth management strategies, we will be positioned to not only help you avoid the pitfalls above but also look forward with poise and anticipation for your future.
As always, if I or a member of our team may be of any help in either starting or continuing this conversation, please be sure to let us know. Until next time, here’s to the pursuit of living a better life!