According to Oxford Risk, a behavioural finance firm, after questioning 150 wealth managers, revealed 65 per cent of investors frequently make investment decisions based on emotions.
Some 73 per cent say those emotional decisions have come at a significant financial cost to their clients.
In fact, the majority of wealth managers say emotionally-driven investing costs their clients more than 100 basis points of investable wealth every year, on average.
The advisers questioned collectively manage €327 billion across Europe.
‘The average investor probably costs themselves around 3 per cent per year because of behavioural decisions,’ says Dr Greg Davies, Oxford Risk’s head of behavioural finance and former head of behavioural finance at Barclays.
My response. Wow. Double Wow or Wow²
If you are reading this, the chances are you are not one of those investors. Who would admit to that? You are not someone who is losing money through poor decisions which are emotionally based. If you were, you would have already taken action.
Sadly, I have some bad news for you. Simply feeling it doesn’t apply to you means your decision is emotionally based! Chances are, it is you but you’ve not recognised it yet.
In fact, most investors have no clear evidence to clearly identify the behavioural costs. Moreover, investors can’t really explain what they are even paying for investment services. Most guess.
It is Rudyard Kipling’s “if” that should be remembered. The words are above the player’s door at Wimbledon.“If you can meet with Triumph and Disaster, and treat those two impostors just the same…” The point is most investors only question performance when they make losses. Rarely do they ever question when they make gains. When in fact, they should review performance, independent from whoever is managing their portfolio, even when returns are positive. Triumph and disaster should be treated the same.
It clearly makes sense to recognise how your emotions impact your investment returns.