Why we are all hard wired to be bad investors
by Gary Moglione
Investing our savings is an extremely important part of life that will have a strong influence on retirement, home ownership and the quality of our lifestyle. Therefore, you would expect us to have evolved to be efficient investors. Unfortunately, we are hard wired to be bad investors as many of our natural instincts force us to fall into a number of behavioural traps that result in poor investment returns. The first one is herd mentality. This becomes more prevalent at points in the cycle when retail investors are highly active as investment tips get passed on in workplaces, pubs and dinner parties. Everybody has heard stories of people getting rich investing in Bitcoin or technology stocks that has made them motivated to get involved. A small number of high-profile stocks have posted stellar returns in recent years. As a result, valuations have been pushed up ever higher. Higher valuations should spark caution when investing but the reverse actually takes place. People talk about their gains to friends and family sparking more interest in a stock. This causes the share price to rise even further detaching it from intrinsic value. We have witnessed this many times before with the ‘nifty fifty’ period in the late 1970’s and the tech boom in the late 90’s. Dare I say we are in a similar environment at the moment.
Market Snapshot
- Global equities rose 2.9% last week
- OECD revises up 2021 global growth forecast to 5.6%, an increase of 1.4 percentage points from the OECD’s December forecast
- Brent crude fell -0.2% last week to $69.2 a barrel
- Gold rose 1.6% to $1727.1 per ounce.