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Mindful Investing Working with your advisor to avoid common investment mistakes.

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Presentation on theme: "Mindful Investing Working with your advisor to avoid common investment mistakes."— Presentation transcript:

1 Mindful Investing Working with your advisor to avoid common investment mistakes

2 Mindful Investing Working with your advisor to avoid common investment mistakes

3 Mindful investing Mental shortcuts Investor behaviour Predictable cognitive mistakes Investor emotions Value of advice What we will cover:

4 Mental shortcuts Source: Mindvestor, 2009.

5 Which black dot looks bigger? Optical illusions

6 Which table looks longer?

7 Investor behaviour Assumption #1: Markets are efficient Assumption #2: Investors are rational Original assumptions

8 not “rational” “normal” predictably normal predictably normal Investors are… Investor behaviour

9 Predictably normal Mistakes are systemic We repeat them again and again We can learn to recognize and understand them Incorporate into our thinking Account for them in our decisions Adjust for them in our expectations

10 Investor behaviour Investor Behaviour Investor Return Investment Return Investor (mis)behaviour Investment returns are more dependent on investor behaviour than on fund performance Investment Return Source: Carl Richards, Behavior Gap: The Psychology of Investing, Copyright by GetRichSlowly.org

11 Predictable cognitive mistakes Asymmetric loss aversion Herding Availability bias Overconfidence

12 Coin toss Heads – you pay me $100 Tails – I pay you $X How much would I have to pay you for you to take the bet? $200 - $300 Asymmetric loss aversion

13 Symptoms of asymmetric loss aversion Asymmetric loss aversion Taking money out of the stock market when prices fall 1 Selling winning investments more readily than losing investments 1 Choosing only GICs or bonds and avoiding stocks 1 Leaving money sitting in cash and not wanting to invest it – even when the market stabilizes Source: 1 Belsky, Gary, and Thomas Gilovich. Why smart people make big money mistakes and how to correct them: lessons from the life-changing science of behavioral economics. New York: Simon & Schuster, pg. 65. Print.

14 Remedies for asymmetric loss aversion Asymmetric loss aversion Focus on long-term performance and not short-term volatility Create a comprehensive financial plan that is based on a portfolio of diversified investments – not one stock Develop – and stick to – an Investment Policy Statement

15 7 to 9 college students All but 1 were confederates The lone man was told the experiment dealt with visual judgment Herding Solomon Asch experiment Source: Asch, Solomon E., “Effects of group pressure upon the modification and Distortion of judgment," in h. Guertzkow, ed., Groups, leadership, and men (Pittsburgh, PA: Carnegie press, 1951).

16 Solomon Asch experiment Source: Asch, Solomon E., “Effects of group pressure upon the modification and Distortion of judgment," in h. Guertzkow, ed., Groups, leadership, and men (Pittsburgh, PA: Carnegie press, 1951). Herding

17 Solomon Asch experiment 75% yielded to majority on at least 1 trial 50% yielded to majority on over half the trials In 37% of trials, the “lone man” yielded to the majority. Herding Source: Asch, Solomon E., “Effects of group pressure upon the modification and Distortion of judgment," in h. Guertzkow, ed., Groups, leadership, and men (Pittsburgh, PA: Carnegie press, 1951).

18 Herding Follow the herd, then do the opposite Oct. 08 -$5,936,149 Oct Aug S&P/TSX Composite Index Source: IFIC Long-term funds total net sales

19 Symptoms of herding Herding Spending decisions are heavily influenced by products, restaurants or vacations spots that are “in” 1 Making investment decisions frequently 1 Investing in hot stocks/funds because they’re “popular” and selling them when they’re “out of favour” 1 Basing investment decisions solely on the opinions of others not on sound investment advice from a knowledgeable advisor Source: 1 Belsky, Gary, and Thomas Gilovich. Why smart people make big money mistakes and how to correct them: lessons from the life-changing science of behavioral economics. New York: Simon & Schuster, pg Print.

20 Remedies for herding Herding Be patient – don’t rush into investments Avoid hot stocks/funds and investment trends Turn down or tune out the noise – assess gains and losses less frequently Look for opportunities to be a contrarian

21 Source: Barnett, Dr. Arnold, “How numbers can trick you; the six deadly sins of statistical misrepresentation”, Massachusetts Institute of Technology, Technology Review, October 1994, pg Availability bias.02 Cancer Headlines per 1,000 Cancer Deaths 1.7 Murder Headlines per 1,000 Homicides Plane Crash Headlines per 1,000 Airplane Deaths

22 Symptoms of availability bias Availability bias Choosing mutual funds that are heavily advertised or stocks of companies that are frequently in the news 1 Overreacting to good/bad news Believing an “opinion” to be factual Source: 1 Belsky, Gary, and Thomas Gilovich. Why smart people make big money mistakes and how to correct them: lessons from the life-changing science of behavioral economics. New York: Simon & Schuster, pg Print.

23 Availability bias Remedies for availability bias Avoid impulsive decisions based on an emotional reaction – make decisions based on your long-term financial plan Access information that is free of cognitive biases – usually through an advisor Remove sources that have a biased opinion

24 Overconfidence 82% of people say they are in the top 30% of drivers 80% of students think they will finish in the top half of their class 86% MBA classmates say they are better looking than their classmates Business conference attendees retirement estimates Source: Tilson, Whitney, Applying Behavioural Finance to Value Investing, T2 Partners Inc., November :1

25 …is what investors expected to earn in % Overconfidence …is what investors expected to earn in % 18.1% …is what investors expected to earn in … is what investors expect to earn in a typical year 1 Are investors overconfident? 7.9% Source: 1 The Gandalf Group, Fall 2009 Canadian Investors’ Survey, Conducted on behalf of Standard Life, BNN and CTV, November 2, Rheault, Magali. The Kiplinger Monitor, a change in attitude. April 1, Dalbar, Quantitative Analysis of Investor Behaviour, GlobeHySales, Harbour Fund inception June 1997.

26 …rolling 3-year average S&P 500 total return % Overconfidence 9.9% …rolling 3-year average S&P/TSX total return … is what investors expect to earn in a typical year 1 Are investors overconfident? 7.9% Source: 1 The Gandalf Group, Fall 2009 Canadian Investors’ Survey, Conducted on behalf of Standard Life, BNN and CTV, November 2, Rheault, Magali. The Kiplinger Monitor, a change in attitude. April 1, Dalbar, Quantitative Analysis of Investor Behaviour, GlobeHySales, Harbour Fund inception June 1997.

27 …equity investor return % …rolling 3-year average S&P 500 total return % Overconfidence … is what investors expect to earn in a typical year 1 Are investors overconfident? 7.9% Source: 1 The Gandalf Group, Fall 2009 Canadian Investors’ Survey, Conducted on behalf of Standard Life, BNN and CTV, November 2, Rheault, Magali. The Kiplinger Monitor, a change in attitude. April 1, Dalbar, Quantitative Analysis of Investor Behaviour, GlobeHySales, Harbour Fund inception June 1997.

28 Symptoms of overconfidence Overconfidence Are you human? Believing you can consistently “beat the market” 1 Making frequent trades – especially with a discount or on-line brokerage 1 Not knowing your personal rate of return 1 Believing that “investing in what you know” is a guarantee of success 1 Source: 1 Belsky, Gary, and Thomas Gilovich. Why smart people make big money mistakes and how to correct them: lessons from the life-changing science of behavioral economics. New York: Simon & Schuster, pg Print.

29 Ask “three questions” Find an opinion contrary to yours – and think about it Write down the reasons you could be wrong (list of pros and cons) Estimate a range of possible outcomes (i.e. portfolio returns) then subtract 25% from the low number Remedies for overconfidence Overconfidence

30 Investors suffer from predictable cognitive mistakes What we know: They won’t go away and we can’t ignore them We can learn to recognize and understand them #1#1 #2#2 #3#3 Predictable cognitive mistakes

31 The cycle of market emotions Source: Westcore Funds/Denver Investment Advisers LLC, Point of maximum financial opportunity Optimism Excitement Thrill Euphoria Anxiety Denial Fear Desperation Panic Capitulation Despondency Depression Point of maximum financial risk “Wow, I feel great about this investment.” “Maybe the markets just aren’t for me.” “Temporary setback. I’m a long-term investor.” Hope Relief Optimism Investor behaviour

32 Mindful investing Value of advice Depth of expertise Disciplined process Emotional maturity Objective balanced perspective Tailored advice Access to resources unavailable to the average investor

33 ®CI Investments and the CI Investments design are registered trademarks of CI Investments Inc. This communication is published by CI. Any commentaries and information contained in this communication are provided as a general source of information and should not be considered personal investment advice. Every effort has been made to ensure that the material contained herein is accurate at the time of publication. However, CI cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. Facts and data provided by CI and other sources are believed to be reliable when posted. CI cannot guarantee that they are accurate or complete or that they will be current at all times. Information in this presentation is not intended to provide legal, accounting, investment or tax advice, and should not be relied upon in that regard. CI and its affiliates will not be responsible in any manner for direct, indirect, special or consequential damages howsoever caused, arising out of the use of this presentation. You may not modify, copy, reproduce, publish, upload, post, transmit, distribute, or commercially exploit in any way any content included in this presentation. You may download this presentation for your activities as a financial advisor provided you keep intact all copyright and other proprietary notices. Unauthorized downloading, re-transmission, storage in any medium, copying, redistribution, or republication for any purpose is strictly prohibited without the written permission of CI.


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