Three panelists discussed these behavioural issues in Toronto during a panel discussion hosted recently by Morningstar Canada. They spoke about 3 behavioural tendencies to be aware about.
Over here, the panelists offered various means that industry participants and individual investors can employ to improve investor outcomes.
Ensure that your portfolio is fully diversified.
It's alright to act on a tip or insight with respect to a specialty investment, but this should always be done from a base of being fully diversified. That means owning different types of assets, having exposure to different countries and regions and industries.
“I know it's very basic, but it prevents and deals with at least a lot of our behavioural biases,” says Tom Bradley, President and Co-founder of mutual-fund manager and direct seller Steadyhand.
Choose the right investment tools.
There are a wide range of investment products and techniques available to individual investors and their advisers. For example, investors in target-date funds are less prone to panic during market downturns because these funds are a "set it and forget it" type of product.
“It's not fundamentally about what investments there are. It's about how it's sold to the investor and what their expectations are,” says Steve Wendel, Head of Behavioural Science for Morningstar.
Clarify the investment goals.
In getting to know an investor's goals and personality, Jason Stewart, Executive Adviser, Financial Services, with consulting firm BEworks, recommends combining in-person interviews and online questionnaires. There's a "tremendous anonymity effect" online, he says, resulting in much more disclosure and better information for the adviser. He adds that this process also helps individual investors in clarifying and specifying their goals.
As part of the goals-setting process, clear distinctions should be made between investing for shorter-term goals such as saving for a college education or a down payment on a home, and longer-term goals such as saving for retirement. Help frame the differences between those pots of money.
Make investing convenient and automatic.
To alleviate stress and information overload, investors and their advisers should look for ways to automate some investment decisions.
“If our attention is strained by far too many things asking for it, the more we can make good behaviour automatic the better,” says Stewart.
Bradley says pre-authorized services such as regular contributions of new money and automatic portfolio rebalancing prevent investors from "overthinking" their investments. "They don't think about it," he says. "They don't try and time it."
Don't check portfolios and performance frequently.
“The more often people look at their portfolios, the worse off they are. It warps behaviour to look at the day-to-day and for that matter even the month-to-month changes in someone's portfolio,” says Wendel.
Advisers should encourage clients to take a calmer, longer-term view.
But during market downturns, says Stewart, it's important for advisers to communicate with their clients and to convey the message that the long-term tendency of market returns is positive.
Reframe emotions about market risks,
The sensation of excitement is quite similar to the sensation of anxiety, says Wendel. For example, a market downturn can provoke anxiety but it can also be viewed as an opportunity. As Wendel put it: "I think, markets down. Great! Opportunity for profit." The fundamental data doesn't change. What does change is how the data is interpreted.
This post initially appeared on Morningstar.ca
