Five Behavioural Resolutions for Investors in 2020

Joe Wiggins wrote this excellent article on his website.

The notion of a New Year’s resolution now seems more associated with lofty aspirations and hasty failures, rather than substantive and prolonged change.  Yet for investors caught in the daily cacophony of market volatility, financial news and perpetual performance assessment; opportunities for genuine reflection are scarce. Most of us spend our time dealing with the noise of the present rather than considering how we might make better long-term investment decisions.

Even if introspection over the New Year period doesn’t result in a dramatic change, any occasion that affords investors even a modicum of space for contemplation away from every day should be grasped readily.  And for those investors in need of resolutions to follow, here is a shortlist of simple (but not easy) goals driven by insights from behavioural science:

Make a set of market / economic predictions for the year ahead: Most of us are aware of our general incompetence at making forecasts and predictions, but most of us engage in it anyway.  In order to disabuse any notions of prescience, simply write down some market forecasts for the year ahead and then review them in 12 months’ time. This will provide a cold dose of reality.  This task should be carried out each year to prevent us from getting carried away if we get lucky with one round of predictions.

Check your portfolio less frequently: The best defence against most of our debilitating behavioural biases is to engage with financial markets less regularly. The more we review short-term performance and pore over every fluctuation in the value of our portfolios, the more likely it is that we will make poor, short-term decisions. The common wisdom that being ‘all over’ our portfolio is some form of advantage is almost certainly one of the most erroneous and damaging beliefs in investment.

Read something/someone you disagree with each week: Confirmation bias is incredibly damaging for investors and its influence appears to have been exacerbated by the rise of social media. We follow those who share our principles and read articles we know we will agree with, whilst haranguing those with contrary views.  This is easy and it makes us feel good.  The problem, however, is that there are things that we currently believe that are wrong, and if we live in an echo chamber we are unlikely to find out what they are.

Keep a decision log: Our memories are incredibly fickle. It is not simply that we forget things, but that we re-write history based on information that we receive after we have made a decision. It is almost impossible to learn from our past judgments unless we have a clear and simple record of what we were thinking (and feeling) at the time we made a decision.

Be comfortable doing nothing: Particularly for professional investors, the pressure to act can be overwhelming. Financial markets are in a perpetual state of flux and uncertainty, and investors are expected to constantly react: “something has changed, what are you doing about it?” Doing nothing can be seen as lazy, negligent or incompetent when in the majority of cases it is the best course of action.  Sticking to your principles and enjoying the long-term benefits of compounding sounds easy, but the behavioural realities of investment mean that this is far from the case.  Doing nothing requires a great deal of effort.