Source: London Stock Exchange, 2/4/2020
Availability bias
When making a decision we are often persuaded by information which is readily available. If it’s in the news or we can recall it easily we deem it to be important. The implications for investing during market disruption can be profound: if all of the data and daily bulletins are negative, we may act without questioning or without assessing whether the actual fundamentals are sound.
It is common during times of market shocks for active fund managers to state their case loudly – it is relatively easy to identify sectors (for example, travel, retail) that may lag in the short term. But our research into fund data from Morningstar shows that on average active funds don’t outperform passive funds in a downturn*. And finding them is very difficult.
Taking stock of these biases
Being aware of these biases doesn’t prevent them from taking hold or causing us internal conflict during troubling times. But their effects may be mitigated with a little insight into how they assail our emotions and derail our reasoning.
A way to overcome any biases is to look at information objectively – and to try and assess the difference to our wealth that taking an action, or not acting at all, will make.
We may also reduce the impact of our cognitive and emotional shortcomings by choosing a company to diminish their grip on our senses. At Netwealth, our investment professionals have a wealth of experience in handling the biases that individual investors typically face, and we take a robust approach towards managing uncertainty whenever it occurs.
Please remember that when investing your capital is at risk.
* Source: Morningstar/Netwealth data. To end December 2017.