To save us time and energy we often take mental short cuts – and in times of uncertainty we especially seek the reassurance of what we know. We should therefore be aware that we may prioritise the familiar even if it has a harmful effect on our investments.
Source: Netwealth. Assumes initial sum of £500k, growth of 5% a year, and a difference in fees of 0.65% vs 1.65%.
The effects of this bias may also manifest itself in ways which may be unfamiliar:
- Previous returns from a wealth manager may have beaten your expectations, but you should be wary of falling under their familiar spell if they try to justify high fees even when performance is not up to scratch. Especially as expected returns in future from equities and fixed income may be lower than previous years and hence agreeing to pay such a high proportion of your return expectation as a fee seems illogical.
- In the familiar world of traditional wealth management, investors may be offered a bespoke portfolio – highlighted as a premium option compared to a model portfolio. But don’t for a second think it is a better option: we believe a bespoke portfolio is more likely to underperform than a centrally managed portfolio and cost you more.
- Favouring the familiar may cause us to prefer to stick with the status quo and be slow to adopt new trends which are beneficial. For example, persisting with active large cap funds even though 90% of these funds underperformed the S&P 500 index in the 15 years to the end of 20181 – a failure which repeatedly plays out in a downturn, too.