The markets always seem to be in action if we go by the news, views and experts’ comments. As per them, there are a lot of events happening that might affect our investments – the budget, elections, US Interest Rates, Immigration issues etc.
We almost feel scared if we do not do anything!
This constant need of doing something is called action bias.
We humans have a tendency to do something whether it is of use or not. We stand in a queue and constantly check other queues and many times change the queue. We start in our car on a certain route but keep thinking if another route would have been better.
Action Bias & Your Investments
In case of investments, we want to take some action as we believe taking action will improve our returns and we will build more wealth.
But the reality is different. Action bias just keeps us busy but it does not always lead us to more wealth or better returns. Many times, investors end up losing money as they take some action in panic or they buy or sell investments hastily reacting to some news or view. We have seen people reacting badly to some news items and selling their investments in panic. This leads to a fall in the prices of those investments and there is more panic and more people sell it off leading to erosion of value.
When it comes to personal finance, apart from gaining knowledge, analysing investment options, deciding on targets to buy and sell, the one activity that takes a lot of time is ‘to do nothing’. Doing nothing means waiting. Waiting for investments to grow in value.
Read – The Art of Thinking Clearly
Stay away from action bias using the following techniques
1) Be Patient
Markets go up and down. It is not always possible to buy and sell at the best prices. Your investments might be at a loss now. But if you have researched well and chosen the right product, it will bounce back in some time.
Think and observe what is happening, analyse the situation and then take a decision. When you are doing this, it does not mean you are doing nothing. It means you are not biased with taking action but can wait and watch and make the right moves if required.
2) Do not Track Investments Too Much
A long-term investor does not care about the price shifts and volatility in the short-term. If you keep checking your portfolio, you are biased to take action.
Do not evaluate the performance of your portfolio frequently. Keep it away from your mind unless there has been some radical in your life or world and you know you have to take some action. Read – Medium Maximisation – another factor in action bias
3) Invest as per your Risk Profile
Before investing, check your risk profile. How much risk can you stomach? How much capability do you have in terms of taking the risk in your finances?
You should know the answers to these questions before you start investing. If you have a low-risk profile and you invest in risky instruments, you will lie awake in the night.
At the same time, if you can take risks but are stuck with low-risk low returns investments, you will worry constantly that you could have made more money.
4) Be wary of success stories and investment experts
We all have heard of people who have made a killing in the stock market or bitcoin or bought and sold the property and made a tidy sum. So-called investment experts are all around us trying to guide us to become rich.
Such stories tempt us to take action to improvise on the portfolio. But you need to be aware and in control of yourself.
You should invest as per your requirements, current market condition (or an all-weather asset allocation strategy) and using some common sense. If you have an effective financial planner to manage your wealth, you are in good hands.
Action bias is inherent in humans. It is important to have an investment strategy. But it is more important to know when to acquire assets and when to sell them off.
A strong investment strategy will remain so only when the investor is patient and take a cool-headed decision.
Please share your observations & experience in the comment section.