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Your Behavior is screwing your Investments up (And you likely think you are immune to it)

As I grew older, I seem to be able to appreciate Carl Richards latest article more and more. Folks should tune in to his weekly column.

I soon realize that we are all long term investors when volatility is low and unable to hold when volatility spikes. I see that in my own behavior. And this knowledge means that I have to refine my system knowing that I have this flaw and I should take care of it.

There is a hidden cost to why even when your unit trust or mutual funds perform not as expected, your results could be even worse. And that is used to a person not being conscious about the behavioral traps that he can succumbed to.

As Morningstar’s data shows, the average equity mutual fund in the United States had a 10-year average return at the end of 2013 of 8.18 percent. The average investor only earned 6.52 percent. That’s a difference of 1.66 percentage points. It may seem like a small number, but it makes a big difference when you think of it in terms of dollars.

Imagine 10 years ago that you put $100,000 in an average American equity mutual fund. If you just sat there, you’d have $219,517 in your account at the end of 10 years. But because we’re human, you more likely only earned the 6.52 percent return of $188,066. That equals losing more than $30,000, a 17 percent difference.

Sometimes the worst enemies are ourselves and I truly believe that the solution can be distil down always to this 4 areas:

  • Decision and Determination: Understand that behavioral aspect is a really important part of the Wealth Building equation and implicitly make an effort to improve on it
  • Knowledge: Gather and grasp the various forms of Bias and what you can build into your system to prevent it
  • Systems and Habits: When you have knowledge, you are conscious and build in triggers to tell you, you may be suffering from outcome bias, confirmation bias. Build a review system to learn from your trades and decisions
  • Environment: If its not helpful, leave the environment. Step away from investment chat groups if they provide too much noise, tune out the newspapers since it is not part of your process. Most of all you may want to not check prices so much

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Lionel

Wednesday 5th of March 2014

Great article! And it's great that you're able to step outside yourself and recognise that you suffer from these biases too (just like everyone else)!

Kyith

Wednesday 5th of March 2014

it is likely i will encounter many much more. just need to know they are biases. i wish i am a serial killer.

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