The Psychology of Investing
Erica Stephenson - Nov 06, 2021
According to recent reports, investors using a U.S. discount brokerage platform are checking their portfolios at an alarming rate of seven times per day. It's not difficult to do. Today, often all it takes is one quick swipe on our smartphones.
According to recent reports, investors using a U.S. discount brokerage platform are checking their portfolios at an alarming rate of seven times per day. It's not difficult to do. Today, often all it takes is one quick swipe on our smartphones. However, frequent portfolio checking may be hazardous to your investing health.
Modern behavioral scientists have determined that our cognitive biases can sometimes cause us to make decisions that may not be in our best interests.Our brains operate in two cognitive states: automatic and reflective. Our automatic system is uncontrolled, fast and unconscious. Our reflective system is controlled, effortful and deductive. Cognitive biases occur when the automatic system, often influenced by the current environment, dominates the reflective system. This is why going grocery shopping while hungry can lead to unhealthy food choices: our reflective system is easily overridden by a state of hunger.
By checking portfolios frequently, there is a greater chance that we will trigger these biases. One reason is that frequent checkers have a higher probability of seeing a loss, which may drive us to want to take action. By checking S&P/TSX Composite Index performance on a daily basis, there is a 48 percent likelihood of seeing negative performance. If you were to check only once per year, this would decrease to 28 percent. However, even seeing positive performance may trigger us to make certain decisions, such as selling a well-performing investment too early.
The good news? With a bit of effort, we can learn to control these behaviors. Some of the most seasoned investors have trained themselves to avoid emotional impulses. We can also integrate different techniques into your investing programs, like regularly rebalancing portfolios, using managed products to put buy and sell decisions in the hands of experts, or incorporating systematic saving or investing programs to avoid market timing.
Most importantly, don't forget the influence that human behavior can have on investing and plan ahead before it can have an impact. This may include sticking to your wealth plan during volatile times or avoiding the urge to react to social and media pressure. And remember, we are here to help provide support as we work with you.