Unconscious bias: the sneaky saboteur of smart investing

Sometimes we’re not even aware of the biases that shape our decisions. This is known as unconscious bias, and it’s something many investors and professional managers work hard to overcome.

I was recently reminded of this when my son asked my wife why I eat so quickly. Her reply was simple: 'Because Daddy had two brothers.'

When I was young, if I didn’t inhale my food, someone else would. Even though there’s now a zero probability of that happening - my brothers are rarely in the same city as me, never mind the same room - the habit has stuck.

In investing, the same thing happens. We often carry behaviours shaped by past experiences into situations where they no longer serve us. Investors can become overly fearful about market events, leading to one of the biggest failings in the investment world: trying to time the market.

This week’s chart shows why that’s so costly. It looks at what would have happened if you’d invested £100,000 in global equities 20 years ago.

Buy & hold: £100k grows to £744k.
Miss the 10 best days: £100k grows to £400k.
Miss the 20 best days: £100k grows to £266k.
Miss the 30 best days: £100k grows to £193k.
Miss the 70 best days: £100k falls to £70k.

The irony? Those 'best' days often arrive within days of the worst ones. Yet, after a sell-off, many investors fail to hold their nerve and stick with the market. The result: they miss the start of the recovery, which can often be concentrated in fewer than 10 trading days.

A well-diversified portfolio is like a well-balanced team, combining the safety of defensive assets (think cash and bonds) with the creativity of midfielders (alternatives and income strategies) and the high-octane potential of forwards (equities and other risk assets). Each season (or year), the star player is likely to change, sometimes it may be US equities, sometimes commodities, and so far this year it’s been European equities. No single style goes on winning forever.

Key takeaway

Be aware of your own behavioural biases, think long term and take stock before making big decisions. In investing, time in the market beats timing the market - and as this chart shows, the difference can be staggering.

Or as my dad used to say, don't leave any chips at the table!

‍

‍Find out more about our multi-asset solution

‍

This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.