Are you happy with your investments?

11 January 2017

While the start of a new year may be a natural time to reflect on how your investment strategy has fared over the past year, Peter Brooks, Head of Behavioural Finance, cautions against relying too much on the memories of your investing experience.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

There’s no harm in keeping an eye on your investment performance, but it’s important to keep things in perspective. Investing is a long-term commitment, so while you should keep an eye on how you’re doing, it’s good to be aware of the unconscious bias that can affect how we remember our investment experiences. Peter Brooks explains more in this helpful video.

You can read the full transcript of this video below

The peak-end rule is a finding from psychology and it basically means that when we’re thinking about how satisfied we are with something that’s happened, our satisfaction isn’t all the stages along the way equally weighted. But, actually what we do is tend to focus on a couple of points in that journey: often the peak, the highest point, and the end because it’s the most recent point.

Thinking about that peak-end rule and how it might affect an investor, traditional finance theory tells us that actually two investors who start at the same point, get the same return and therefore end at the same point, should both be equally happy. But actually their experiences along the way mean that they are often not. An individual who’s had a good ride get their peak somewhere along the journey and then end with a bit of a dip, often is fairly unsatisfied. Whereas an investor who gets their dip early and then starts to rally towards the end of the period, actually can be quite happy with their experience. How we get there really matters and the peak in the end are two points that tend to be quite salient in the way that we think.

Investors first of all need to realise that actually there’s no real end-point to their investing. We don’t start to think, “Oh it’s the year end, all my investing has come an end”. Actually we’re going to invest for many years and by having these arbitrary points where we have ends, we start to assess, we cause our self to fall into this trap of perhaps being more dissatisfied than we really ought to be. So, actually all investors need to do is be a little bit more long-term focused. We always say from the Behavourial Finance team: “Look for the future”. That’s where we are investing for and actually that’s still just as important here. But, we like, as individuals, to have these little end points because they’re little check-points along the journey that help us understand are we achieving what we want to achieve. And that’s really useful and we do want to keep doing that, but remember it is just a very small slice of time that you’re looking at. If you can, look back to a few more equally sized points in time. So, if you’re looking just at this year, look back at last year, look back at the year before that. That’s what’s going to give you a sense of the average levels of risk, return and therefore the average level of satisfaction that you may have with your portfolio.

Avid listeners to our team outputs will actually recognise that our themes don’t change a great deal, so our new outlook for 2017 is much the same as it has been for 2016. The best thing you can do as an investor is get invested, stay invested and keep diversified. We know there’s going to be risks that we already perhaps have identified some of them for 2017 and some of those will come out, some of them will happen, some of them won’t. Some risks that we haven’t even thought about yet for 2017 will become apparent as we go through the year. But the biggest thing we can advise our investors is to actually think about, these are the reasons why you invest. Investing is for risk; you get rewarded because you take these risks and that’s what we need people to focus on into the new year. So, stay invested, keep invested and be as diversified as possible.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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