Managing behaviour when investing doesn’t sound too difficult, does it?
Unfortunately doing the right thing at the right time is harder than it sounds. Avoiding doing the wrong thing is even harder! Investing money can be a roller coaster of emotions. During the course of investing you will likely experience excitement, anxiety, fear and possibly even panic.
Those who understand the importance of remaining disciplined will still find it hard to make the right decisions when markets are turbulent. Behavioural coaching and managing emotions is an essential part of what we do in helping you to achieve your financial goals.
Behavioural biases are at the root of destructive behaviour when investing. There are a huge amount of behavioural biases that are built into the human mind. Some of the most relevant for investing are…
- Loss aversion -the fact that most people dislike losing money more than they enjoy making money.
- Overconfidence – most people will think they are better at making investment decisions than they are.
- Confirmation bias – the tendency to seek out evidence that support’s one’s existing views.
However, just being aware of these biases isn’t enough.
The Role of Behavioural Coaching
Part of our ongoing role is to provide behavioural coaching to overcome these biases and help control the emotions that can affect your financial future.The starting point of all of this is to develop and update a clear financial plan. Having a plan has been shown to help combat biases. In times of turbulent markets, it is useful to be able to refer back to your financial plan to focus on the long-term, re-affirm why certain actions are being taken and remind you to stay the course.
Having a clear investment philosophy is also important. It shows the reason certain actions are being taken. Especially when markets are dropping it is useful to refer back to why certain investment principles should not be abandoned.
But how much value does behavioural coaching add? A study by Vanguard found that behaviour coaching can enhance your returns (normally by avoiding losses through bad decision making) between 1% and 2% per year*.
If you know someone who would appreciate a discussion on how behavioural coaching fits into the bigger picture of achieving their goals, please do get in contact.