The psychology of investing

Dean Uncategorized No Comments

investor-psychology

In a Swedish self-survey of driving skill, a staggering 90% of respondents rated themselves as “above average” drivers!  This slightly amusing result is an example of overconfidence – dangerous when you are behind the wheel, but also potentially damaging to your finances if it flows through to assessing your skill as an investor.

In fact, one of the reasons that investing successfully can be difficult is that the human brain is hard-wired with a number of psychological biases that often push us into making poor decisions.  Below are some of the more common biases.  How many do you recognise in your own behaviour?

Overconfidence

As per the Swedish driving example above!

Confirmation Bias

Selectively seeking out information that supports your views (and ignoring everything else).

Home Bias

Favouring investments in your home market, because they are more familiar to you.  Also related to Attention Bias.

Attention Bias

Favouring products, companies and investments that are in the news, more than those that are not.

Long Shot Bias

The gambler’s instinct to favour the “next big thing” investment with potentially big returns, even if the likelihood of the long shot delivering is very low.

Anchoring

In an investment sense, making decisions not based on future prospects, but on the price paid for an investment.  Also related to Loss Aversion.

Loss Aversion

An interesting phenomenon where investors fear losses considerably more than they enjoy equivalent (or even greater) gains.

These tendencies can at times lead to poor decisions when it comes to asset allocation, the selection of investments, and the timing of buy/sell decisions.  Recognition of which biases affect you the most, and being able to step back to make decisions rationally are the best counter measures.  And of course, engaging a good financial adviser should go a long way towards helping you avoid investment errors caused by psychological biases 🙂

Thanks for reading.

Dean Edwards

 

Business Foundations

Dean Uncategorized No Comments

pillars

Hi, and welcome to the very first Nest Egg Investments blog post!  My goal is to write a new post weekly, offering my thoughts mostly on subject matters relating to investing, retirement saving/spending, KiwiSaver, etc.  I’ll also write from time to time on what I have learnt (including the mistakes I’ve made) in going through the process of setting up a new business from scratch!

For this inaugural post, I want to step back a bit from the nuts and bolts of investing, and talk about some of things that were uppermost in my mind as I worked through setting up Nest Egg Investments, and which will (I hope) provide a point of difference.

The first question I asked myself was “what is the core need you are trying to meet with this business”?  Is it simply about helping people to get wealthy, or wealthier?  Well, certainly a big part of what Nest Egg Investments does is to work with clients to maximise their investment returns, so that is indeed an important need that is addressed.  But an even greater need for most clients is to achieve financial peace of mind – to be secure in the knowledge that their hard-earned savings are being invested wisely, and to not be stressed about their finances and their investments.

So defining the most important core need that Nest Egg Investments aims to meet, it is to provide financial peace of mind.  What I like about this goal, is that it involves much more than just picking good investments – it’s also about understanding the client, their goals, their financial personality, financial discipline, and coaching.

There are also 3 over-arching business values that form the building blocks for the Nest Egg Investments business.

The first is simplicity.  There is undoubtedly a lot of complexity in the financial advice industry.  This often extends to unnecessarily complex products, and customer communications that are full of jargon and technical gobbledegook.  My goal is to de-mystify investing, describe things in simple, easy to understand terms, and avoid unnecessary complication wherever possible.  And if I don’t fully understand a product or service, I will certainly not be recommending it to my clients!

The second is transparency.  My aim here is to be fully up front about the services I provide, and the fees I charge.  As simple as that.

Last but not least, I decided at the outset that Nest Egg Investments would be fully independent.  What does independent mean?  Firstly, the income Nest Egg Investments receives is from client fees for advisory services provided – and nothing else.  Nest Egg Investments doesn’t accept any commissions or payments from product providers.  Secondly, Nest Egg Investments considers a very broad range of investment opportunities, and isn’t restricted to advise on just a narrow range of products.  Simply put, this ensures there are no conflicts of interest, and Nest Egg Investments acts in the best interest of the client at all times.

These are the business foundations that were top of mind when I formed Nest Egg Investments: providing financial peace of mind, simplicity, transparency, and independence.  They are the philosophies that define the company, and differentiate the business.

Thanks for reading.

Dean Edwards