Our bias for action
With markets and the values of our investments declining, it is human nature to want to “do something” about it. This is quite common. In many situations in everyday life, to solve problems or resolve issues, everyone’s first inclination is to take action.
This behavior served us well when we were hunter-gatherers seeking food, shelter and avoiding predators, but can be downright detrimental in investing.
As humans, we definitely have a preference for action over inaction and this bias can play a significant role in all kinds of economic choices.
For example, when the economy is faring poorly, people are tempted to “do something” even if the risks outweigh the possible gains. This is often ill-advised and can lead to efforts to try and time the markets, which is an ineffective and costly way to try and build wealth.
Because our nature is also to want to see patterns and connections between things, we also look to past results as being predictive for the present and future. We assume winners will always be winners, and weak performers will always be weak performers, and constantly try to move around after the fact.
Once upon a time, this bias for action served us well, but it can become a risky behavior in investing. See Figure 1 which shows what happens when an investor misses out on the best days.
Figure 1: Missing the best days a risky proposition
S&P 500 and TSX Indices January 1, 1990 – December 31, 2007
Tim Leung, B.Soc. Sc., CFA
Vice-President, Head of Asian Equities and Portfolio Manager
Tim leads our key Asian mandates and has over 18 years of investment management experience.
“Building long-term wealth takes patience and discipline. It means ignoring your feelings, and charting your course using your brain, not your emotions.”
