In times of volatility, investment mistakes are made and biases enter the picture

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[SPONSORED] PSGWealth’s Adriaan Pask describes different forms of bias that can affect investors’ decision-making and lead to costly mistakes. Moneyweb Investing

CIARAN RYAN: In times of volatility, investors tend to make irrational decisions. We saw that in the Covid crash of March 2020, when many investors – fearing a much deeper crash – sold into a falling market, only to miss out on one of the fastest rebounds in history. It’s in times of volatility that mistakes are made and biases enter the picture. Markets are not rational and market participants do not act in a rational manner.

And then there is a similar study in the unit trust space that’s performed by Morningstar. What they find is that the differential is closer to 2%, which you can understand is slightly lower than the one from Dalbar, just because there are obviously fixed-income mutual funds or unit trusts in there as well, where the impact might be slightly more muted. But the point remains that there are very dire costs involved in these investor behaviours.

ADRIAAN PASK: Very simply, confirmation bias is essentially looking only at research or comments that support your own view of things.

The studies also show that investors place more emphasis on the short-term performance numbers than on longer-term ones. So it’s almost the same as the adage that we find in the sports environment, where they say you are only as good as your last innings, and everything else is forgotten.

 

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