Investors, like most people, have biases that are shaped and reinforced by experiences. Biases can lead to flawed decisions and choices, so being aware of them and understanding where they come from can help you make better investing decisions and achieve your financial goals.
That’s the theme of a recent report from BMO Wealth Management which has found that the different biases of the Millennial, Gen X and Baby Boom generations have shaped their investing goals and preferences.
For example, perhaps surprisingly, Millennials are more conservative investors than Baby Boomers.
The reason for this is that the financial crisis of 2007-08 happened just as they were starting to come of age and take on financial responsibility and left them feeling less secure and more cautious about financial matters than previous generations.
Boomers, on the other hand, have greater confidence in investments over the long run as historically strong average returns have helped them prepare for retirement and they now are prepared to ride out the ups and downs of the market.
Saving and investing for retirement is important for Millennials but only about half as important as it is for both generation X and Boomers. For Millennials, saving for short term goals such as a vacation, to purchase a new home or upgrade an existing home were cited as reasons to save and invest.
Bias preferences go beyond retirement. Millennials are more likely to put money aside and then decide later what to do with it than both generation Xers and Baby Boomers. Millennials also are less inclined to buy and hold for the long term compared to the other two groups.
There are a number of biases that can colour or negatively impact investor behaviour.
Confirmation bias is a psychological phenomenon where people tend to seek out information that confirms their existing opinions and overlook or ignore information that refutes their beliefs. When researching an investment, someone might inadvertently look for information that supports his or her beliefs and fail to see information that presents different ideas, resulting in a one-sided view of the situation.
Attention bias can be created when companies and products are mentioned more frequently and become favoured by investors.
Home bias is the tendency to purchase investments in companies that are locally known and recognized. Hindsight bias is a mistaken belief that past results were obvious and could reasonably have been predicted while FOMO (fear of missing out) bias is worrying about not being part of a positive investment trend.
One way to overcome biases is to adopt a portfolio approach to your investments and spread them over a number of areas. This approach is adopted more frequently by Boomers and Gen Xers than Millennials, who tend to favour individual stocks, mutual funds and exchanged traded funds over investing in a managed portfolio.
“Biases can lead to flawed investment decisions,” says Chris Buttigieg, director, Wealth Institute with BMO Wealth Management. “A professional adviser can help you overcome biases and also help you with understanding investing concepts, strategies and options.”
There are lots of education and information sources for investors through financial institutions, publications, and online portals. Many financial advisers these days even have their own web sites with resources.
“The really important thing is to get involved and active, whether you do it on your own, with a professional or through a combination of both,” says Buttigieg. “Understanding how (biases) arise from your background and life experiences can help you make better investment decisions to achieve your financial goals.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.