As I’ve mentioned in four previous blog posts, I’m proud to say that David Mountain, an ISACO client and engineer was one of the many people that loved my new book, How to Make Money in ISAs and SIPPs. In his review, David said:
“I guess the part of the book I most enjoyed was ‘Chapter 9: Beyond Greed and Fear’ – I found myself saying ‘that’s me’ and I can fully recognise this behavioural finance, which is a very interesting subject. I would rate the book with 5 stars. “
David wasn’t the only person to like Chapter 9. Ray Hughes, another ISACO client, entrepreneur and private investor said:
“I was delighted to see that Stephen also covered the psychology of investing within Chapter 9. In my opinion, as a more seasoned investor, this is one of the critical aspects that an investor must understand if they are going to be successful in the markets.”
Another person who loved that chapter Andrew Tait, a business owner and client of ours had this to say about it:
“I particularly enjoyed Chapter 9 on investor behaviour, seeing my past self in the descriptions of how we can act irrationally when investing.”
And so because Chapter 9 was so popular, I thought it best to run a series of articles taken from the chapter to see what you think. This is article number five in the series.
The good news is that we are currently offering the paperback version of How to Make Money in ISAs and SIPPs (RRP £9.95) and a paperback copy of my bestselling classic, Liquid Millionaire (RRP £19.95) – for just £4.95! But this offer is only available to the first 100 people that respond. Buy now to avoid disappointment.
Excerpt below taken from Chapter 9, How to Make Money in ISAs and SIPPs
A fine line between confidence and overconfidence
In a 2006 study entitled ‘Behaving Badly’, researcher James Montier found that 74% of the 300 professional fund managers surveyed believed that they had delivered above-average job performance. Of the remaining 26% surveyed, the majority viewed themselves as average. Incredibly, almost three quarters of the survey group believed that their job performance was average or better.
Clearly, only 50% of the sample can be above average, suggesting an insanely high level of overconfidence in the fund managers surveyed. As you can imagine, overconfidence is not a trait that applies only to fund managers. Keep in mind that there's a fine line between confidence and overconfidence. Confidence means realistically trusting in your own abilities, while overconfidence usually indicates an overly optimistic assessment of your knowledge or control of a situation.
How to avoid overconfidence
To avoid overconfidence in your own investing, I suggest you document and review your investment record. It's easy to remember your one stock that gained 50% in a single day, but records may reveal that most of your investments are under water for the year. Understanding the psychology that causes us to act overconfidently will help you avoid it.
Before we really understand something, we may either lack confidence or express overconfidence. A common type of overconfidence stems from inexperience. For instance, more than 70% of naive investors wrongly assume that they are enjoying above-average returns. Also bear in mind that professional fund managers, who have access to the best investment/industry reports and research in the business, can still struggle at achieving market-beating returns.
Human beings are not rational
As you’ve just discovered, psychological research has documented a range of biases that can affect decision making when it comes to money and investing. These biases sit deep within our psyche and, as fundamental parts of human nature, they affect all types of investors, both professional and private. Understanding them can help you to work around them.
Modern portfolio theory is built on the assumption of a rational being, who is unaffected by emotions such as greed, anxiety, regret, hope and fear. This super-rational investor simply does not exist. Everyone sees the world from a perspective which is uniquely theirs, and investing is no different. People have individual goals, requirements, desires, fears and hopes for their wealth.
What is your financial personality?
We all have different habits, different people we trust for advice, and different beliefs about the right decision on any occasion. But we all exhibit very similar psychological biases in our financial decision making, which can lead to poor portfolio choices and subpar investment performance.
Understanding your financial personality is vitally important. It can help you understand why you make the decisions you do, how you are likely to react to the deep-rooted uncertainty in investing, and how you can control the illogical elements of your investment decisions. In this chapter I’ve highlighted some of the psychological traps in investing that most people are susceptible to. Thinking about these in the light of your own financial personality will hopefully help you avoid them.
End of excerpt
I hope you liked the excerpt and thank you for reading it. Remember, we are currently offering the paperback version of How to Make Money in ISAs and SIPPs (RRP £9.95) and a paperback copy of Liquid Millionaire(RRP £19.95) – for just £4.95! This offer is only available to the first 100 people that respond.
As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
ISACO specialises in ISA and SIPP Investment and is the pioneer of ‘Shadow Investment’; an easy way to grow your ISA and SIPP at low cost. Together with our clients, we have an estimated £57 million actively invested in ISAs and pensions*. Clients like us because we have a great track record of ‘beating’ the FTSE 100**. Over the last 16 years, we’ve outperformed the Footsie by 60.2% and over the last 5 years, we’ve averaged 14.5% each year versus the FTSE 100’s 8.8%. You can find us at www.ISACO.co.uk.
What is Shadow Investment?
Picking the right fund for your ISA and SIPP is not exactly the easiest job in the world. And knowing 'when' to buy and 'when' to exit is even more difficult! Our ‘Shadow Investment’ Service is here to help. Our service allows you to look over our shoulder and buy the same funds that we are buying.
When we are thinking of buying a fund, we alert you so that you have the opportunity to buy it on the same day that we buy it. We also tell you about when we are planning to exit the fund. You control your investment account, not us. You can start small and invest as little or as much money as you like.
By knowing what we are buying, when we are buying and when we are exiting, throughout the year you can mirror our movements and in effect replicate our trades. This means you have the opportunity to benefit from exactly the same investment returns that we get. Our investment aims are 10–12% per year.
We are totally independent, fully transparent and FCA compliant. We’re warm, friendly and highly responsive and it’s a very personal service that gives you direct access to the Sutherland brothers; ISACO’s two founders.
Who are ISACO’s clients?
Clients who benefit most from our service have over £250,000 actively invested and the majority of them are wealthy retirees, business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector, such as IFAs and wealth managers.
Do you have questions?
To have all your questions answered, call 0800 170 7750 or email us at: info@ISACO.co.uk.
* November 15th 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients.
** Long-term performance: December 31st 1997 - December 31st 2013 ISACO 91.3%, FTSE 100 31.1%. 5 year performance: December 31st 2008 - December 31st 2013. ISACO Investment performance verified by Independent Executives Ltd.