According to the World Economics Forum in 2019, every day on average there are 306-billion emails, 500-million tweets and 3.5-billion Google searches.
I would venture to say those numbers have increased due to the COVID-19 crisis. The news can be overwhelming and some days flat out disheartening. It becomes hard to separate truth and fiction. Trying to make sense of so much information can impact our ability to make rational decisions under emotional duress.
TD Wealth has a behavioural finance discovery tool that assists investors to identify, learn about and help avoid their unique blind spots. The goal is to make better financial decisions.
Here are some common financial blind spots:
1. Confirmation bias: Confirmation bias is the tendency to search for, interpret, favour and recall information in a way that confirms one's personal beliefs. If Bob thinks the stock market will drop, he looks for information that confirms he is right. He also discounts information that tells him otherwise, skewing his ability to take a measured approach.
2. Sensitivity to noise: We live in the technological age of information overload. The amount of negative media in the world is remarkably high. The problem is filtering out noise. Often a self-acclaimed pundit is telling everyone to sell before things get worse. They are not accountable if they get it wrong, which often is the case. Your wealth can suffer irreparable damage if you make a knee-jerk reaction. Remembering your investment goals and objectives should guide your investments, not the most recent opinion.
3. Framing: Consider you have a million dollars in an investment portfolio. Due to market events, you are down 10 per cent, or $100,000. Often, framing in terms of dollars tends to elicit a heightened emotional reaction and could lead an investor to sell in panic. By looking at similar problems in different ways, it can help bring rationality to our decisions.
4. Short-term focus: During times of crises, people tend to focus on the immediate challenges that can evoke our fight or flight response. We like the "10-10-10 strategy" when making a decision. Consider how you will feel 10 minutes from now, 10 months from now and, finally, 10 years from now. The goal is to maintain perspective. For example, every stock market crash in Canada and the U.S. has always recovered and moved to new highs.
5. Loss aversion: As humans, we tend to feel more pain for portfolio loss than we do from equivalent gains. One helpful solution is to step back the frequency you check on your investments. We do not advocate an ostrich approach; however, checking daily in midst of a sell-off yields no positive energy. It can increase anxiety and the risk for an emotional reaction. Similarly, diet plans do not recommend daily weighing as small changes can upset an individual and cause them to second guess their long-term goals.
A final thought: On March 23, when news was arguably at its worst, the U.S. stock market, measured by the S&P 500 was down 35 pr cent from its high back in February. Had someone panicked and sold, they would have missed an incredible 26 rally over the next three weeks, up to April 16. These are the types of decisions we want to help avoid.
During these challenging times, it can be hard to keep ones investing emotions in check. We believe working with a trusted professional can help provide a balanced picture and help guide you to the best possible outcomes.
Stay safe and, until next time, Invest Well. Live Well.
(Written by Keith Davis)
This document was prepared by Eric Davis, vice-president, portfolio manager and investment advisor, and Keith Davis, investment advisor, for informational purposes only and is subject to change. The contents of this document are not endorsed by TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc.-Member of the Canadian Investor Protection Fund. All insurance products and services are offered by life licensed advisors of TD Waterhouse Insurance Services Inc., a member of TD Bank Group. For more information, call 250-314-5124 or email Keith.firstname.lastname@example.org.