The Discerning Investor by Julie Jason

Biases Can Drive Your Investment Decisions

Have you made an investment decision during the coronavirus market that you regret? Perhaps you sold out of your stock investments or stock mutual funds in March when news headlines were dire?

On March 21, Bloomberg reported the following:

-- New York City Mayor Bill de Blasio said: “This is the beginning of the crisis. It’s going to get a lot worse before it gets better.”

-- James Bullard, president of the Federal Reserve Bank of St. Louis, predicted U.S. unemployment could hit 30% in the second quarter, and the gross domestic product could plunge 50%.

Meanwhile, the stock market (S&P 500) was rapidly declining -- a nasty fall of 32% over a matter of weeks from the peak of Feb. 19.

That was March 21. Did you react? Did you sell?

Only a few days later, on March 23, the decline stopped. Since then, the S&P 500 rose dramatically (through press time, Sept. 17) by over 50% from the bottom.

What moves some to sell and others to stay the course?

Some point to behavioral biases.

“Our minds take shortcuts when we make decisions. ... Usually, these shortcuts are for the better: They help us react quickly, and they help us manage the thousands of decisions we make every day. There are times, however, that mental shortcuts lead us astray -- that’s when they become biases.”

The above quote is an introduction to a report by Morningstar, a global financial services company, titled “Bursting Biases in Volatile Times: A Behavioral Checklist for Investors Facing Turbulent Markets” (tinyurl.com/y2wecpvk). The following are the six points in the checklist:

Get to know your biases

“Research shows that understanding our biases can help us spot them in our decisions,” the report says. That’s a point well made, but it does take some homework.

Turn down the noise

“When volatility hits, you may want to create a modified schedule (of when you listen to the news), but still keep it calm and moderate -- maybe make a rule that you can only catch up on the news once at the end of the day, or even once a week.”

Another good point. And I’ll go further: Use the news to enhance your knowledge, but not to trigger an action.

Create speed bumps for decisions

“Sometimes, the only thing we need to make a good decision is time. But it can be tough to slow down when our emotions are running awry.”

Agreed. Emotions should not rule.

Reconnect with your goals

“If you start feeling anxious about your finances, take a break from day-to-day market performance and check in on your financial goals.”

This step is the most important, from my point of view as a professional money manager. Behavioral economics tells us that shortcuts come into play when we are faced with uncertainty and are without a plan.

Any good financial plan needs to include what to do in a market meltdown. For example, retirees who depend on their investments for income need assurance that they can hold steady during a declining market. Part of the plan can be as simple as setting aside a cash reserve for such times, to protect against having to sell positions during a market decline.

Be your own devil’s advocate

This point is also helpful in slowing down an emotional reaction. Argue both sides before taking any action. That is, ask yourself to state the reasons for selling an investment (the market is going to zero) and the reasons why you might want to buy that same investment (fundamentals are strong and the price is right). That exercise might give you a different perspective, revealing the logic behind a decision before taking action.

Thoughtfulness matters

“It’s extremely hard to stay calm and wait out the storm when your portfolio’s losing value -- we all have a tendency toward action. Don’t suppress this urge; redirect your efforts.”

Look at the opportunities that the current market might offer. To read more on behavioral finance, go to juliejason.com/columnist/resources.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION