COLUMN: Need to know about long-term investing
IN MANY areas of our lives, we display biases in the way we typically behave.
Whether it is shaving before showering in the morning, stressing if we are at the airport two hours before departure time or our attitude to money, we all have preferred behavioural patterns.
It shouldn't be surprising then that when it comes to investing, we allow our biases to affect our behaviour.
For some, seeing a large bank balance (however you define "large") is comforting and the long-term cost of not investing that money so it is working is not a consideration.
The fear of losing that nest egg by making a poor investment decision leads to a particular behaviour bias that will damage your financial future. Instead, obtaining an understanding of how long-term investing works, asking a financial planner to match your risk profile with a suitable range of investments and implementing will benefit you in the long run.
Some investors have a bias toward only considering investments (shares, property, whatever) which are performing strongly at the moment.
These are the ones who always buy at the top of the market and then suffer as the market goes through the inevitable value adjustment.
Research of a wider range of investment opportunities (even those which are not "stars") will help to overcome this bias.
Rarely does a particular asset class achieve superior performance in consecutive years. Reluctance to admit failure can also be a behavioural bias.
A tendency to sell winning investments ("this can't last") but holding losers in the hope that they'll "come good" is often a poor strategy.
A more realistic assessment of bad investment decisions and calling a spade a spade helps us to move on to better investment opportunities.
It's also a natural bias to invest in what is familiar to us.
Properties in the local area, companies we've heard of, industries we know and understand are more comfortable investment targets.
This bias results in a very restricted exposure and almost ensures that the investment portfolio is not well diversified.
Looking for investment opportunities outside our local area (even outside Australia) is possible and will possibly help reduce the overall risk of your investment.
It is important to be aware of and understand the implications of your natural biases in all areas of your life.
Indeed, this is part of being human.
For some biases, the solution is simple or it really doesn't matter but for behavioural biases in our investing, the solution is not as clear. Self-awareness will help but seeking the advice of a professional who knows your particular situation to guide you will assist you see some alternate views and maybe act in a more disciplined way.