3 reasons your investments are losing money or underperforming
Portfolio not doing as well as you’d like? That may be due to biases you don’t even realize you have.
Almost every investor is biased, research shows.
“Because human beings cannot process information as rationally as, for
example, computers, this problem affects almost all investors,
regardless of their age, level of education, gender, etc.,” a study by researchers at Princeton University, funded by the Finra Investor Education Foundation, revealed.
But we have a hard time seeing that: “People tend to show a ‘bias blind spot’ whereby they are unaware of (or ‘blind’ to) biasing influences on their own judgments,” the study revealed. “People deny being influenced by bias in large part because biases often occur unconsciously.”
One of the biggest investing biases is overconfidence (when you think your investing abilities are greater than they objectively are). A 2006 study of 300 fund managers found that nearly three in four thought they were “above average” at their jobs; the researchers concluded that overconfidence was the most common of all the biases. Other biases include a recency bias (when recent events color our decisions to too significant a degree) and loss aversion (whereby we dislike losses more than we like gains).
All told, “in order to invest wisely, people must overcome various psychological biases that can cloud rational thinking,” the Princeton study revealed.
To that end, MarketWatch worked with Openfolio, a site on which investors share information about themselves and their investments, to determine some of the lesser known biases investors commonly possess that may leave their portfolios unbalanced. Below are three.
But we have a hard time seeing that: “People tend to show a ‘bias blind spot’ whereby they are unaware of (or ‘blind’ to) biasing influences on their own judgments,” the study revealed. “People deny being influenced by bias in large part because biases often occur unconsciously.”
One of the biggest investing biases is overconfidence (when you think your investing abilities are greater than they objectively are). A 2006 study of 300 fund managers found that nearly three in four thought they were “above average” at their jobs; the researchers concluded that overconfidence was the most common of all the biases. Other biases include a recency bias (when recent events color our decisions to too significant a degree) and loss aversion (whereby we dislike losses more than we like gains).
All told, “in order to invest wisely, people must overcome various psychological biases that can cloud rational thinking,” the Princeton study revealed.
To that end, MarketWatch worked with Openfolio, a site on which investors share information about themselves and their investments, to determine some of the lesser known biases investors commonly possess that may leave their portfolios unbalanced. Below are three.
NASDAQTue, Dec 22, 2015 4:00 PM EST
In
general, investors tend to invest in companies that have headquarters
near where the live, the Openfolio data showed. Investors in the
Northeast, for example, are more heavily invested in financial companies
than are others; investors in the West in technology; investors in the
South in energy.
David Ma, the head of research and community
development for Openfolio, says this can be a problem because it could
mean that too much of your portfolio is invested in a certain type of
stock. For example, many Southerners may be acutely feeling the energy
sector’s struggles right now, he observes.Your age
Seemingly everybody loves Apple (AAPL) and Facebook (FB) , but other stocks are more beloved by people of certain ages. Tesla (TSLA) , for example, is a favorite among the under 50 set but doesn’t even make the top 10 for those over 50; on the other hand, the over 50 set puts General Electric (GE) among the top five (it ranks No. 2 for both the 50-to-64 group and the 65-and-over group) while the younger generation isn’t as keen on it. The under 50 set also has Twitter (TWTR) as a favorite (it ranks No. 1 among those aged 25 to 34 and No. 7 among 35- to 49-year-olds) but doesn’t make the top 20 for older Americans.
5 most popular stocks for every age
In
general, “as you get older, there is definitely a preference for more
blue-chip investments,” says Ma. Meanwhile, “younger people like newer,
hotter stocks” as a general rule, he says. That means that younger
people tend to have “higher highs” than the older investors — but also
some major losses. And overall, “their performance is worse,” he says,
thanks to the fact that many of the hot, new stocks they choose don’t do
that well. (Though, on the plus side, they have more time to make up
for these losses.)
Where you work
Investors
tend to overinvest in the sectors in which they work, so those who work
in tech, for example, tend to invest more heavily in tech stocks. Ma
says this is likely because they feel they know the sector well and thus
are comfortable putting their money into it. “It’s a familiarity bias —
people really invest in what they are more familiar with,” he says.
“But what you are more familiar with could be putting you at more risk,”
he explains, if you overinvest in a certain area that doesn’t perform
well.
Culled from MarketWatch
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