When you have an itch it’s natural to want to scratch it, even when you know you shouldn’t.
There are many behavioural biases that can impact your investment decisions, and these emotional reactions could lead to negative results. Doing nothing in order to avoid making a decision is imaginatively called the status quo bias or inertia. This idea was made famous (at least amongst economists) by Daniel Kahneman of “Thinking Fast and Slow” and Richard Thaler of Nudge fame. But status quo bias relates to ignoring or postponing a decision, rather than maintaining a path that you are on because you feel it’s the correct one.
This doesn’t mean we’re not prepared to take action when we feel the time is right. One way to think about it is being on a boat on a calm ocean then it’s relatively plain sailing with more time to focus on the horizon you’re heading to. But that doesn’t mean you stop paying attention - in fact, these are times when you must actively avoid complacency. But if that boat is caught in a storm it may need to rapidly change course several times, before it can return to smoother seas.
At Wealthify, we primarily make our investment selection based on our long-term outlook, although there will be occasions where we feel the market is suitably mispriced and the odds are strong enough in our favour to warrant action. It is vital not to overpay for investments, as you may get caught up in a bubble (where some investments are overvalued) in the process. Many of the reasons why we focus on the long-term rather than the short-term are apparent when we take this argument to its extreme by comparing Day Trading vs. Investing. But a long-term focus also avoids waste, such as transaction costs, trading fees, and in some cases may see lower tax rates if applicable.
But conversely, there is also the need to manage volatility (the ups and downs of the market) and by extension, the potential risk that is inherent when investing. One of the reasons that we currently have a higher than active cash position is because the outlook remains highly uncertain. This buffer allows us to take advantage of market declines when they occur, but also given that markets are highly volatile at present, it lets our portfolios have a smoother path than they would have if we had a higher allocation to shares. That isn’t to say that market volatility is always a bad thing, but our responsibility as long-run investors means that we must focus on both what could go wrong as well as what can go right – remember, returns cannot be guaranteed and there’s a risk you could end up with less than you initially put in.
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
