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Bridging the Behavioural Gap

Posted on: January 1, 2019

It’s officially 2019—

The tree is away, the lights are down and the resolutions have begun.

To say that 2018 was a “rollercoaster of emotions” would be an understatement. The TSX ended the year down 12%. This was ignited by a summer of uncertainty, stoked by fall trade disputes and raged through winter with declining global growth.

Happy New Year, right?

Heading into the holiday season, I took some time to reflect (as we all do) on where we’ve been and where we’re going. Let me preface what follows with this: I’m not interested in the making the cliché prediction that you might be sensing. Instead, I want to acknowledge a trend that I’ve been challenged with and faced over the past 12 months—managing investment beliefs over investor emotions.

At the turn of 2018, we were bombarded with news about newly minted millionaires riding the coattails of crypto, only to see the currency plummet back to Earth and, throughout 2018, it was difficult to avoid the elephant in the room AKA the conversation of Canada’s favourite new commodity, cannabis. Stocks soared on speculation and (eventually) demand eclipsed supply in a way that has caused consumer frustration and market price retraction. The quick climb of crypto in 2017 and cannabis in 2018 have reminded me of an old adage worth repeating:

“The market needs to climb a wall of worry.”

Government shutdowns and border security aside, this is a wall that serves as a timely reminder that a gradual stock ascent (full of fits and starts) is actually healthy. It’s this volatility that holds our attention, identifies trends and informs investment decisions.

Who knew?! Volatility (albeit incremental) can actually be your friend.

On the flip-side, there are more violent forms of volatility. A straight scale up a wall of optimism presenting no predictable trend, and—inevitably—breeding complacency that makes knowing when to hold and when to fold a challenge. What makes this worse is the “noise” that surrounds it. Media propagates paranoia while friends flaunt their overnight fortunes. The fear of “missing out” stirs emotion and conjures self-doubt. This is when emotion overwhelms the investor’s decision into something less rational. It’s a behavioural gap that’s tricky to traverse and a conversation I find that I’m pacifying on a regular basis.

So, what do you do?

1. Be a conscious investor. Mindful of emotions and equipped with a long-term plan. Often a gradual ascent will result in a softer landing when turbulent times come knocking.

2. Avoid the value trap. “Buy low, sell high” is among the most basic investment philosophies, but this value investing trait doesn’t prevail in all market conditions. Mining for more expensive holdings that aren’t over-valued will sustain during a selloff—and amidst uncertainty.

3. Earmuffs. Eliminating the “noise” is hard, I know, but essential if you are to stay sane in this game. Engage the people you trust, the ones who know the facts and believe in the process.

* * *

Alas, I leave you with this shameless plug that I found while trying to suppress my own curiosities on the topic:

“By understanding the common behavioural mistakes investors make, a quality financial planner will aim to help clients take the emotion out of investing by creating a tactical, strategic investment plan customized to the [individual’s level of risk].” †

An authored endorsement, not mine (I swear).

† Investopedia (April 2017). 8 Common Biases That Impact Investment Decisions.

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