Mental Biases

Good Morning!

Have you ever heard of biases in your everyday life? Be it biases in your own way of delivering decisions towards solving a problem or biases in executing an act that warrants for an action, have you ever paused and wonder if the results had been done based on careful thoughts stemmed from gathered historical data stored in your mind bank? If your answer is undoubtedly YES!, then why the end consequences can be incorrect at sometimes if not at all times? Why actions and our decisions can be proven wrong regularly? Why solutions to a problem can never be sought by you even after trying for a numerous time?

The answer lies in the human mind itself. We humans tend to formulate a set of data embedded in our mind; which is gathered tirelessly throughout life's development. In the investment environment, this sets of data determines our investment behavior. Investor's pattern of investing behavior to a larger extent influences the anticipated return of total investment portfolio that is designed to meet the financial objective. To put it in a simple language, your investment rate of return is tied to your behavior!

Our investment behavior is can be described as a compounded sets of biases and non-biases, and it magnifies as you take part in own's personal growth.

Some of the biases are, "Representative biases", "Anchoring biases", Availability biases", "Loss Aversion" and "Mental accounting".

It is believed that all biases are products of thinking irrationally.

Let me share with you a real life story of how biases can influence investment.

I approached a client of mine sometime in November 2013. The client wanted to invest RM 100000 in Unit trust investment scheme and asked me to choose funds according to his investment objective. This was what i recommended to him.

Invest RM 50000 in an equity type capital growth category fund. The fund's financial year end was December 30, 2013 and therefore most likely if a distribution is announced, to reinvest all dividend proceeds back into the same fund to capitalize on the units. In addition, i advised him to further invest the balance RM 50000 into the same fund after the distribution date which was around the first week of January 2014.

I educated him that since the distribution comes from the NAV of total fund, the post-distribution fund price will drop. And when it drops, it is a right time to accumulate more units, thus bringing down the cost per unit of the fund. This strategic move was well accepted by him in November 2013. He went on to invest as planned.

However, in January 2014 he changed his mind. Although the NAV price post-distribution became much lower than his holding cost per unit, he insisted to further hold on to the topping up. He did not further invest the balance RM 50000 to the existing initial RM 50000 that already been invested. His reason was that the NAV will further head downside and he believe that after the coming Chinese New Year festival, the price will further drop. His irrational behavior was supported by his previous convicted experiences. He anticipated that usually prices will fall after the chinese new year. Although his irrational behavior was predictable, i am pretty sure that he had made a decision based on past historical data, and this type of bias is known as the "Anchoring Biases".

Personally, my observation is opposite to his. His procrastination attitude will definitely cause him to lose the opportunity prevailing at current. 

What did i do then, to convince him? Well, i did exactly nothing. Since he was so adamantly anchored to his anticipation, i let him to have his own way. Hey! isn't customer is always right?"

So, as a conclusion, given a scenario as above, i advise investors to carefully judge and derive to conclusions based on strategy and avoid biases. Think rationally!

Penning off for now, happy investing!

Managing Client's Anticipation

Hi! We meet again.

I would like to start this article by touching on an issue that disturbs many Unit Trust Consultants. I believe that if this issue is not tackled properly, the relationship between the clients and the consultants will get sour and subsequently depleting the consultants reservoir of customers.
The issue in reference here is confronting the client's anticipation against their return on investment on funds entrusted under the consultants care.
In my course of work, i have met many clients with various background. From the perspective of Investment knowledge, i am able to sum all them up into 2 types of investor category.

1. First category is the type of people classified as investors who assumed that they know how the profits are captured.

2. Second category are investors who understands exactly how the profits are captured.

The distinction between this two is closely related to investment education!

In the first category, investors assumed that they know. Their assumption is purely based on their loose understanding of what is expected from them. These investors have one anchored perception buried deep in their mind and it is obviously continuous sustainable ANTICIPATED RETURN irrespective of how markets move. This understanding is very dangerous if investment time frame is not mentioned. Clients anticipation for aspired return can be managed if the investment holding period is mentioned.
To cite a case in reality, one client of mine withdrew her investment after 7 years. The redemption was done against my advice. During the time, the market  was declining. And because of her fear that the market would collapse, she decided to sell off all units. I have advised her to hold because the decline in price was just temporary and it will not prolong. However, she didn't buy my words.
If only the investor reiterated that her holding period is 7 years (instead of disclosing time frame, which normally all investors practice), i would have redeemed her position before the 7th year.
Many investors would like to keep their positions even if the target return have been met. That is fine, but i prefer to lock in the profit thereafter. Because of no disclosure is made on their time frame, consultants usually will let the fund move on market's direction.

The second category of investors mentioned above are the true investors. These investors understand the concept and the affect of 'duration/holding period' to the overall performance of the unit trust investment. They anticipate that they would achieve the aspired return at the end of stated period and, what happens during the tenure of the investment period is less of a concern. Volatility in market is a common thing to them. There is a popular saying that goes like this, "Being an investor requires us to think and act like an investor".

Consultants have a greater responsibility to educate their clients, especially in the area of investment behavior. Parting knowledge to clients are no longer seen as a burden but a service rendered with honesty and integrity.

When You Invest, Think Like An Investor and Be An Investor.

Here, i would like to share a real time experience i had with my Unit Trust clients.

6 years ago, i helped my client to invest RM 100000 to purchase an Unit Trust fund. This fund is categorized as Equity and focused primarily on capital growth. Dividend payout is incidental! The fund's NAV (Net asset value) has an asset exposure in South East Asia markets. Client required an above average return on his investment.

The client has conveyed that his investment holding period is at long term period and he was told that there would be volatility in the NAV along the investment period before achieving above average return. He also been told about the strategy of optimizing return via "Buy Low, Sell High" concept.

Okay, here comes the miserable part!

6 years down the road, his return had reached about 6% to 7% annual return. However, due to the pullout of investors funds from domestic capital market, this fund's NAV dropped and the return was now about 4%. 

Client has indicated to me that he needed to withdraw all units due to this sluggish return, but i told him that the drop is only temporarily and he should leave the units untouched. I suggested to him that he should wait for the NAV price to surge back before withdrawing. The volatility is normal but my advice was unheeded.

The client had withdrawn all at a small annual return of 4 %. (The client could have exercised to redeem all while the return was at 6% to 7% earlier, but he decided to wait).

This case is a classical example of avoiding to adhere to the basic optimizing strategy as mentioned above, i.e. Buy Low , Sell High!

I LEARNED ONE IMPORTANT LESSON AND IT IS , WHEN A CLIENT CONFESSED THAT HE UNDERSTOOD ON THE APPLICATION OF VARIOUS UNIT TRUST INVESTMENT STRATEGIES, HE ACTUALLY NOT!!

When you invest, think like one and act like one!

Vijaya Devan