We all have biases, and some can affect investment decisions and have a negative impact on returns. However, being aware of your investment biases can help you avoid them.
Investment home bias
Familiarity keeps many investors’ portfolios concentrated in Canada. This restricts opportunities, diversification and growth potential. While it’s true that Canada has many strong businesses, they represent a small fraction of what’s available globally.
Furthermore, a large proportion of our most successful companies are concentrated in just three sectors: energy, materials and financial services.
There are ways to benefit from greater geographic diversification while respecting your comfort zone. For example, we can seek out Canadian companies that operate internationally and that are, therefore, exposed to other countries’ economic growth. We can also look just south of the border to the U.S. market, which shares many of the Canadian market’s characteristics but provides access to a broader range of companies.
Let’s say someone offers you two choices. You can take a crisp $100. Or you can gain $200 and then lose $100. The net result is the same: you’re $100 richer. But most people would choose the first option because losing money hurts. This bias makes some investors shy away from growth opportunities to avoid losses. Others refuse to get rid of underperforming investments because they’re in a loss position, even though there may be better opportunities elsewhere.
The key here is to set and maintain an appropriate asset allocation. Your portfolio mix is designed based on a “macro” view of your personal situation — one that balances your desire for growth with your need for security. By following your asset allocation, we can ensure you aren’t positioned too conservatively or too aggressively. And regular rebalancing based on analytical analysis, rather than fear of losses, can help you make wise buy-and-sell decisions.
Follow the leader
Simon says… buy today’s hot stock! There’s a comfort, maybe even a euphoria, that comes from following the herd. After all, everyone else can’t be wrong. Or can they? Often, by the time a rising investment makes the news, it’s gone beyond hot and become overheated. As a result, a lot of investors may pay more than what the stock is actually worth based on fundamental values. We prefer to follow a disciplined approach to investing that incorporates multiple checks against the temptation to follow the herd. For example, regular rebalancing is designed to take some profits off the table and ensure that your portfolio doesn’t skew towards the latest short-term fad.
So, the next time a potential investment makes your body tense up — whether from anxiety or excitement — be aware that a bias may be at work. Recognize it for what it is, and then talk to us. Together, we can protect your portfolio from bias-driven decision-making.
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
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