Given the recent market volatility I thought it may be a good time to look at how an individuals emotional & cognitive biases can get in the way of a good investment strategy. There are several biases at work in our brains every day, most of the time we are unaware of them or how it may impact our decisions. Below are a couple examples:
- Recency – people recall and emphasize events more prominently that happened recently versus those in the past
- Confirmation – people emphasize ideas that confirm their beliefs and discount ideas that contradict their beliefs.
- Loss Aversion – a stronger impulse to avoid a loss than acquire gains
The key to a good investment strategy is not letting these biases have a negative impact on your decision. Having an investment manager can greatly reduce this for you. Let’s take a look at an example.
If you google ‘worlds largest mutual fund’ you will find #15 Fidelity Contrafund. This is the largest actively managed equity fund in the world, currently worth over $101 Billion and closed to new investors. I’ve edited the chart below to show you how holding this strategy for 22 months (Feb 28, 2015 to Dec 31, 2016) an investor may be frustrated with the lack of performance ($21,453 growing to $22,577) earning just $1,124 or 5.2%. Had you sold this you would have missed out on $12,300 (55%) of growth over the next 21 months.
Now let’s look at this another way. What if you started with $10,000 back in September 2008, likely one of the worst times to invest money in the last 100 years. Within 5 months your down to $6,959….OUCH! If you didn't change anything though, that is now 10 years later worth $34,877…SMART!
I believe you should understand your objectives for your money. If you’re using that $10,000 next year to go on a trip, don’t invest into a long term strategy. However; if you have a long term strategy, use the market corrections as opportunities to buy good companies that are on sale…who doesn’t like a deal?
The portfolio manager of Fidelity Contrafund is Will Danoff and Fidelity brought his expertise to Canadians in 2017. We have exposure to his Fidelity Insights Fund in our strategies. The charts used in this illustration were provided by www.Fidelity.com.
Our Private Investment Management strategies will help you to reduce the emotional & cognitive biases from managing your portfolio. Click the PIM link on our website to learn more.
Brendon Boothman, CFP, CIM
Vice President & Associate Portfolio Manager