Staying on Track

Myopic Loss Aversion

Myopic loss aversion is the concept that investors experience disproportionate reactions to investment gains and losses. In short, investors dislike losses more than twice as much as they appreciate gains.

Most people invest for growth. So when their portfolio grows, many think “that’s what it should be doing”. But seeing investment declines elicits an amplified negative emotional response. This can lead to irrational decision making. Short-term market volatility is common in the stock market. Selling your investments just because they are down may feel comfortable in the moment, but it usually isn’t a great decision for long-term investors.

Recency Bias

Another reason investors might sell when the market declines is because they tend to extrapolate what happened recently into the future. But just because the market moved one direction recently, it doesn’t tell you what the future holds. In other words, markets are non-serially correlated—meaning yesterday’s move doesn’t predict today’s.

The fact is, nobody knows where the market is headed in the short term, so focusing only on recent market movement potentially sets you up to fall victim to this natural cognitive error.

Confirmation Bias

Like the preceding cognitive errors, confirmation bias is a basic human tendency and exists in many areas of life. It involves favoring information that aligns with what you believe and ignoring information that doesn’t.

In investing, confirmation bias can lead to mistakes that jeopardize your long-term goals. Reading headlines, analysis and research that supports your view on the market—thereby justifying your current approach—may cause you to underappreciate factors that may have bigger impact.

Recognizing when you’re susceptible to confirmation bias and taking an objective approach to investing is likely to increase your chances of success.

The Power of Education

Simply being aware of the psychological hurdles you face may not be enough to know how to avoid them. At Fisher Investments, we believe a well-informed investor is a better investor. Through continuous education and proactive service, we help our clients stay on track to meet their goals. We also monitor their financial plan to help ensure their investment strategy is adjusted as needed—all with the aim of keeping them on the path to a successful retirement.

With that philosophy in mind, we are glad to provide educational materials on these and other investing pitfalls. Preparing for retirement is an ongoing process that can feel daunting at times, but you don’t need to go it alone. Consider putting Fisher Investments on your side.

At Fisher, you will benefit from the extensive experience of our Investment Policy Committee and receive proactive service from your Investment Counselor, who will keep you updated on your portfolio and our current market outlook.

We believe Fisher Investments can help build you a more comfortable financial future for your retirement. To request an appointment for a complimentary portfolio evaluation, fill out our form* or call us at (800) 568-5082. We look forward to hearing from you.

*No cost and no obligation beyond completing a short request form and brief survey