Be aware of problem, make adjustments. Adopt a portfolio approach, distinguish opinions from facts and invest for long term: Expert
Imagine you have to make a choice between two movies you want to watch today - do you go with your friend's recommendation even though it has poor reviews, or will you go with the more popular one? Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore), says how you decide reflects your individual traits, which can sometimes work in your favour and other times not. Investment decisions are no exception as they often reflect our personal behaviour.
Mr Brandon Lam, Singapore head of the financial planning group at DBS Bank, notes that the fear of losing out - known as loss aversion bias - may be the basis of a gender investment gap. "We observe from a pool of customers aged 35 to 55 that men in general have more investments, while women put their money in insurance," he notes.
"We see 23 per cent more men than women when comparing ownership of investment products, and 16 per cent less men than women when comparing the same for insurance products." Women tend to be more prudent and focused on ensuring adequate coverage, and so have more insurance policies than their male counterparts. Mr Lam adds that this demonstrates a gender investment gap and suggests that women should devote more time to exploring financial investments.
After all, women generally have a longer life expectancy than men. They can expect to live up to 86.1 years here, about three years longer than men. So it is all the more important that women make their money work harder for them, given they would spend more years in retirement, Mr Lam says.
Awareness of the behavioural biases is the first step to solving the problem, says Ms Teh Hooi Ling, portfolio manager at Swiss-Asia Financial Services. "It is a good practice to conduct post-mortem analysis on both successful and unsuccessful investment decisions," she says.
However, the exercise is useful only when conducted in an intellectually honest manner. Investors can also consider reducing the degree of discretion in their investment process through the use of investment checklists. Also, investors should be receptive to opposing views. By listening to different views, investors can prevent themselves from getting trapped in "echo chambers", where their existing beliefs get reinforced by fellow supporters, Ms Teh adds.
She also notes that investors can avoid behavioural biases by delegating financial decisions to an investment manager. But ensure the manager has a disciplined investment process, a well-diversified portfolio and intellectual honesty.
Here's a checklist from Mr Khanna designed to counter our behavioural biases.
Identify your blind spots and make adjustments
We all have our biases, even the most experienced of investors and fund managers. A good starting point is to identify these. Just the awareness of a bias does not help provide a remedy for it, so investors need to calibrate their decision-making process to "adjust" for the potential impact of their behavioural biases.
Document your investment objectives
Write down a checklist of things to evaluate before making purchases or redemptions. This list should include your investment objective and risk factors. It helps to use a professional adviser to guide you in this process. Spend time to review your investment objectives and refine them as time goes by.
Read and pay attention to factual information
Try to distinguish opinions from facts. Take into consideration both positive and negative facts for securities or assets that you hold or plan to invest in.
If you are basing your decision on an opinion , such as a research report with investment views, make it a point to understand the assumptions behind the views. If the assumptions don’t materialise - for example, if an asset class view is based on a gross domestic product forecast that was not realised, review your portfolio and take timely actions.
Adopt a portfolio approach when it comes to investments. Diversify your assets and ensure you have a good mix (and not necessarily an equal mix) of assets. Do not over-concentrate on single securities or assets, or invest in only those you are familiar with.
A portfolio approach also helps to overcome loss aversion where an investor may be reluctant to invest in asset classes based on past experiences. It is good to seek professional guidance for this process.
Invest for the long term
Unless you need the proceeds of your investments for near-term purposes or for emergency use, invest for the long term. This will help to reduce the tendency to track the market every day, or react to panic buying or selling. Overtrading is expensive and should be avoided.
It never pays to follow a trend
Don’t buy an asset just because the price has rallied in the past. Evaluate its suitability based on your own circumstances, especially its risk and reward trade-off.
Sometimes it pays to take a loss
Taking a hit can be the right move, especially for a single security or asset that may have been bought based on biases and that has since moved into over-concentrated positions. With the proceeds of the divestment, you can reinvest in more diversified securities or assets. The key is not to be too attached to your past decisions.
A regular review of your investment portfolio ensures two things.
One is to cap the tendency to conduct unwise buy-sell transactions based on knee-jerk reactions, and in turn, prevent you from incurring unnecessary trading costs. It also allows you to reassess your objectives and the suitability of the underlying investments, including assumptions that were made based on certain opinions or conditions that may not have materialised.
By understanding how investors and markets behave, it may be possible to remove personal biases and allow you to achieve your desired investment goals more objectively.