Overcoming Investment Biases May Help Investors

Employing disciplined investment strategies may help investors increase the potential for a successful outcome and may help reduce fear of losses.

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Podcast Transcript

Host: Sanjay Varshney, Investment Strategy Specialist, Wells Fargo Private Bank

Guest: Marc Doss, Regional Chief Investment Officer, Wells Fargo Private Bank

[Sanjay]:

Hello, my name is Sanjay Varshney, Investment Strategy Specialist for Wells Fargo Private Bank, and joining me in this podcast is Marc Doss. Marc is the Wells Fargo Private Bank Regional Chief Investment Officer for California and Nevada. Marc, thinking on your feet and reacting quickly to events is usually a sign of success in everyday life, but you argue this isn't the case with investing. How so?

[Marc]:

Well, Sanjay, what we find is that such "fast thinking" may result in investors overreacting to market and economic events. Fear tends to get the better of them and they often sell at the worst point in time. Behavioral economists call this tendency "loss aversion."

[Sanjay]:

So, Marc, would last year's Brexit vote, when the United Kingdom voted to leave the European Union, provide a good example of this tendency? After the surprise Brexit vote, global equity markets, including the S&P 500 Index, declined.

[Marc]:

Yes, that's exactly right, Sanjay. Some investors sold their equity holdings into this decline. In less than one week, however, the S&P 500 Index recovered 80 percent of its losses. Within two weeks of the Brexit vote, stocks were higher than before the vote. The rapid up-and-down movement of stocks and the negative headlines caused reactive selling by investors. This investor overreaction to market volatility potentially hurt their portfolios' performance.

[Sanjay]:

So, Marc, how do you suggest that investors overcome these very natural tendencies to react quickly that in other circumstances would have served them well?

[Marc]:

I would say, Sanjay, that the more disciplined investors are, the more they may be able to overcome their fears and biases on their own, but some investors would really benefit from having a coach — such as an investment professional — who can help them stick to their investment plan and remind them of their long-term goals and objectives.

[Sanjay]:

So, Marc, what constitutes a robust investment plan in your opinion?

[Marc]:

Well, Sanjay, there is no cookie cutter plan; each individual investor's plan should reflect their financial goals, risk tolerance, liquidity needs, and investment time horizon, which will influence their desired rate of return. To potentially achieve their objectives, we suggest creating a diverse portfolio of not just stocks and bonds but also other types of assets. So in our view, owning a more diversified portfolio should help overcome fears such as loss aversion since fluctuations in a portfolio's value can be better managed.

[Sanjay]:

So, Marc, if I can sum up some of the points you have mentioned, biases can negatively influence investor behaviors, causing them to underperform the markets and potentially to fail to achieve their unique investment objectives. Having an investment plan and disciplined investment strategy in place can help increase the potential for a successful outcome and may help reduce fear of losses and using an investment professional — or "financial coach" — can help investors stick to their plans during times of market volatility. Is that right?

[Marc]:

That's exactly right, Sanjay.

[Sanjay]:

Marc, thanks for sharing your insights with us. And for our listeners, we recommend meeting with your investment professional to discuss your investment plan. And if you don't have one, we can help you get started. Thank you so much for listening.

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Risk Considerations

All investing involves risk including the possible loss of principal.  There is no assurance any investment strategy will be successful. Different investments offer different levels of potential return and market risk. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. Bonds are subject to interest rate, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Cash alternatives typically offer lower rates of return than longer-term equity or fixed income securities and may not keep pace with inflation.

The information and opinions in this podcast was prepared by Wells Fargo Wealth Management. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Wealth Management's opinion as of the date of this podcast and are for general information purposes only. Wells Fargo Wealth Management does not undertake to advise you of any change in its opinions or the information contained in this podcast. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this podcast.

This information is provided for educational and illustrative purposes only.

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