Improving our investment behaviour is difficult.
Our choices have a messy confluence of influences ranging from the explicit (financial incentives) to the implicit (our own psychological wiring). It is impossible to ever understand precisely why we made a particular decision – it is just too complex. This doesn’t mean, however, that we are helpless bystanders.
In fact, there are many seemingly innocuous areas that we can change to improve the chances that we might make sound judgements. Foremost of these is what we pay attention to – our investment decisions are inextricably linked to what we see and the impact it has on us.
A useful activity for any investor is to note down the major financial market issues that are in focus each week. After a year or so we can review these and realise how unworthy of our attention they were. As an added bonus, we might also want to make a prediction about how these issues will unfold so – on the rare occasion they are meaningful – we can see how lousy we were in forecasting them.
This might seem glib, but it is not. As investors, what we pay attention to dominates our decision making. We are bombarded with information (noise) that encourages costly choices at the expense of our long-term goals.
Our attention is drawn towards things that are available (easily accessible) and salient (provoke some form of emotional response). For investors this means whatever narrative thread is being weaved around random and unpredictable fluctuations in market prices. This is a major problem as the things we are being constantly exposed to are exactly the things that most of us should be ignoring.
For the majority of investors – those who invest over the long-term for profits, dividends and coupons – there is no need to have six screens providing a plethora of real time financial market information. Knowing what equity markets did yesterday is an irrelevance, and it is okay to ignore the latest hot topic.
Even the areas that the industry treats as the most important thing in the world – such as what the Fed will do at its next meeting – just don’t matter that much to fundamentally driven investors with long-run horizons. The asset management industry compels us to engage with all of these distractions, when the route to better decision making is finding ways to avoid them.
The problem, of course, is that avoiding them is incredibly difficult. Not only are we designed to care about what is happening right in front of our eyes, but everyone else behaves as if every move in markets is based on a vital new piece of information. Looking one way while the crowd looks in the opposite direction takes incredible resolve.
Is there anything we can do to stop us paying attention to the wrong things?
The first step is to separate the investment industry machine with its ‘9 seconds until markets open’ or ‘German equities were down 1.2% over the month after weak industrial production numbers’ from actual investing. In most cases, the incessant cacophony of financial market news flow is nothing more than advertising – it is designed to grab our eyeballs, our clicks or our money in one form or another – it is an irrelevance to the real reason most of us are investing. Treat it for what it is – interesting but meaningless at best, a damaging distraction at worst.
Next, we need to clearly and explicitly define what we should be paying attention to. Based on our goals, what are the things that are worthy of our focus and attention? What are the aspects that really matter to meeting our objectives? These will be specific to each individual but will inevitably be stable and boring, and come with no requirement to care that the US ten-year treasury yield fell by 7bps last week.
Asset managers – who are inevitably heavily complicit in this chronic attention challenge faced by investors – will say that financial markets are constantly in motion and that it is not feasible to simply act as if nothing is happening. Clients would be left uncertain, anxious and prone to even worse decisions. Although this sounds credible, it doesn’t really hold water. There is not a choice between adding to the gobbledygook or saying nothing at all. How about putting short-term financial market fluctuations in their appropriate context and explaining why it is rarely that worthy of our attention or action?
Talking about topics also bestows credibility to them. If asset managers spend time discussing monthly market fluctuations and performance, they shouldn’t be surprised if clients consider it to be important. Professional investors should always be asking themselves – how is what I am saying likely to influence the behaviour of my clients?
What we pay attention to tends to drive the decisions we make, and investors are persistently exposed to meaningless noise masquerading as meaningful information. We tend to perceive investment acumen in those individuals with an intimate knowledge of these daily market gyrations, but we have this entirely backwards – the ones with real skill are those who find ways to ignore it.
Joe Wiggins is Director of Research at UK wealth manager, St James’s Place and publisher of investment insights through a behavioural science lens at www.behaviouralinvestment.com. His book The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions.
This article was originally published on Joe’s website, Behavioural Investment, and is reproduced with permission.