FP Answers: How do I recognize investment bias in myself and my adviser? - Financial Post

By Julie Cazzin and John DeGoey

Q: We all like to think we’re truly objective in the choices we make, but I know we all have biases. I’m just having a tough time pinpointing exactly what they are. What can I do to recognize them in myself so that I can become a better investor? — Angela

FP Answers: You’re absolutely right, Angela, we all have biases. The fact that you want to identify them and rectify your behaviour is a positive sign that you’re less biased than others. Many biased people deny they are biased at all.

The primary tools to combat the problem are humility and a willingness to engage in self-aware reflection about the decisions you make. You’ll need to move from passive reflection to making active behavioural change. Consider the following:

• Seek out alternative views from credible sources.

• Write things down. Specifically, try to memorialize your thinking so that you can test your analytical skills when things become clearer.

• Move from thinking fast (knee jerk) to thinking slow (purposeful contemplation of alternatives).

• Consider what might go wrong, including the worst possible outcome.

• Learn the difference between following a narrative and analyzing facts. Be less emotional.

The world has come to be dominated by motivated reasoning, where people believe what they want to believe simply because it feels good and allows them to fit in with their friends and colleagues. Sometimes, trying to be rational involves being unpopular and coping with peer pressure.

Without knowing you personally, my experience is that the biggest bugaboo for investors is often overconfidence. I’m not suggesting you should be pessimistic or cynical, but many people would be better off if they lowered their return expectations by some amount to be more realistic.

The FP Canada Guidelines for financial planning suggest a 60/40 asset-to-income portfolio might generate a long-term return of between four and five per cent before product costs and advisory fees. Most people I meet are counting on more than that even though they insist they are being “reasonable” in their expectations.

John DeGoey is a senior investment adviser and portfolio manager at Wellington-Altus Private Wealth (WAPW), a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

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