You Know More That You Think…. Sounds like a quote from Yoda.

Albert Einstein once said, “The only source of knowledge is experience.” We agree. There’s a vast difference between book knowledge and practical experience. Would you think of jumping into a swimming pool if all you’ve done is read a book on swimming? Probably not.

When it comes to the world of investment and financial planning an instruction manual is helpful, but please not one from a social media influencer. Having a living, breathing financial coach is better. The knowledge and experience a coach can pass on results in a richer, more successful experience. This for us means more than simply growing your wealth. It’s also about building resilience and learning to handle the constant ebb and flow of markets.

David Booth, founder of Dimensional Fund Advisers, one of our main investment partners, recently shared some interesting thoughts on how life’s experience can translate into skills that can equip you for the ups and downs of any investment experience. He puts it this way, “Investing better means living better. Not just because it can lead to having more money, but because many of the habits that serve us well as investors serve us well in life, too.” For example. how we handle decision-making during times of risk and uncertainty.

We can all recognise times where we have navigated uncertainty, weighed up the risks and rewards of decisions we faced. Anyone who’s ever changed jobs, moved house, sent kids off to university or suffered a health or relational setbacks has gone through periods of uncertainty. John W Gardner, an influential and widely respected US politician and philanthropist, once said, “Life is the art of drawing without an eraser.” I for one would have found an eraser handy when I reflect on many decisions I’ve made.

It would be better if we all approached investing free of influence. Some of these can be damaging. Here are some of the more common behavioural biases: 

  • Herding– taking comfort from going with the crowd. A contrary view feels uncomfortable, so the influence and the behaviour of others often holds sway.
  • Confirmation bias– seeking out information and opinions that support our pre-existing views (the social media universe is fuelled by this).
  • Overconfidence– unsupported belief about our knowledge and abilities, especially when bolstered by our preferred social media universe.
  • Recency bias– paying too much attention to recent experience when thinking about the future and considering how likely a particular event is to occur again.

In the Investor Confidence Barometer survey conducted by Embark (May 2023), advisers estimated that emotional decisions cost their clients at least 2% a year. Selling after markets correct, buying expensive investments at the top of the market, or simply not taking enough risk are all examples of behavioural investing biases. So, how does life, experience, and attitude influence investor behavioural models? Let’s consider four groups of investors.

The Preserver

Classically risk averse, often reluctant to invest as losses really hurt. They lean toward inertia, rather than risk regretting decisions they’ve made. This first step into investment is difficult for some. They place a premium on security and stability.

The Accumulator

Likely to be confident, perhaps on occasion overconfident, and prepared to take risks. They may seek to influence advisers with a view to challenge established investment philosophy. Despite their apparent confidence, their apparent surefootedness can slide when they encounter periods of poor performance, and realise they have little control over events.

The Follower

Followers tend to go with the flow and stick with the most popular options. Running with the herd can lead to a fear of missing out. This can provoke knee-jerk decisions such as selling out when markets fall and waiting until markets recover before buying back in. They find seeking advice difficult as they can be swayed by others’ opinions. Finding a trusted adviser is important, as once they find one, their impulsiveness moderates as their understanding grows.

The Independent

These clients are typically experienced, analytical, often contrarian. They may bring their own ideas and opinions based on personal research. Many independents will do their own thing rather than work with a planner. This DIY approach can lead to hurried decision-making which can lead to lower long-term outcomes, and unnecessary cost which they find difficult to admit to. At key points however, such as retirement, inter-generational transfer, or divorce, they are more likely to work closely with a planner.

It is important to recognise the impact of behavioural biases and use our experience to handle each one individually. We tailor our conversations to ensure our advice and coaching is appropriate for each group of clients. These conversations will also differ as the investment cycle elicits differing emotional responses.

Coaching a “Preserver” requires patience and focus on long-term outcomes. Investing involves risk. Explaining the importance of having a long-term mindset and modelling the many what-if scenarios can help alleviate some of the fears. Equipping investors to withstand the short-term market movements can maintain their focus on the long-term outcome they are aiming toward.

When coaching “Accumulators” we stress the importance of diversification, and planning long-term. Misplaced confidence can lead to speculation on “hot” stocks which can prove costly. We would reinforce maximising their investment opportunity through a globally diversified portfolio approach.

For us, “Independents” are an interesting group. Having developed a better grasp of how markets behave, they quickly begin to understand what to expect and cease to be influenced by market movements, and the opinion of others. They recognise the importance of taking the long view, and stick with their plan. Where previously they could have been seduced by the latest investing trend, for example cryptocurrencies, they become more aware and confident in the choices they have made.

Like a tango, it takes two to coach, a student, and a coach (Yoda). Sprinkle some teachability, patience, and commitment to practice what you learn, and you get a better result.

Patience and a long-term mindset are hugely important. As Yoda said in the Empire Stikes Back, “I cannot teach him. The boy has no patience”. We enjoy coaching, we encourage curiosity, and conversation. After all, every day is a school day.