According to the World Economic Forum in 2019, every day on average there are 306-billion emails, 500-million tweets and 3.5-billion Google searches.
We would venture to say those numbers increased during the past few years, considering world events. The news can be overwhelming and, some days, flat out disheartening. 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 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, which 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, then 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 from investment losses than joy 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 of 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 approach and long-term goals.
6. Anchoring: Anchoring bias is the tendency to attach or "anchor" our thoughts to a reference point for making financial decisions — despite the relevance of the information. For example, an investor buys shares in ABC company based on a forecast that the stock price will rise to $100. The investor may become anchored to the $100 target, ignoring new relevant information. If you hear yourself say, “When it hits this price, I will sell,” you could be exhibiting anchoring bias.
During challenging times, it can be hard to keep one’s 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.
Until next time, Invest Well. Live Well.
Written by Eric
The views expressed are those of Eric Davis, Senior Portfolio Manager and Senior Investment Advisor, and Keith Davis, Associate Investment Advisor, TD Wealth Private Investment Advice, as of March 8, 2023 and are subject to change based on market and other conditions. Davis Wealth Management Team is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank. For more information: 250-314-5124 or firstname.lastname@example.org.