Making Rational Investment Decisions

Bias can have a powerful effect on our rational investment decision-making process when investing in unit trusts. If someone tosses a coin 10 times in a row and each time it lands on heads, then what would your choice for the 11th toss be? You may assume that the trend continues and call heads or, believing the trend will buck, you choose tails. Statistically though, there is still a 50% chance that it will land on either heads or tails.

Bias is the reason most of us tend to choose either heads or tails. When we are presented with information, we tend to interpret it according to our personal biases. Our biases and our reaction to the information may prove detrimental when we apply it to investments.

As a counter example; consider an opaque bag containing 50 white and 50 black marbles. If 10 black marbles were removed from the bag, what colour would the 11th marble be? Most of us would say white since the probability of picking out a white one is higher (50 of the 90 remaining marbles are white) than picking a black marble. Unlike the example of the coin toss above, the information we are presented with between removing the 1st and 10th marble is relevant in guiding our choices for the 11th marble.

Emotions may hinder investment success

Heuristics are shortcuts our minds develop that allow us to analyse information and rapidly make decisions. They make our lives easier, but may also lead to errors in judgement.

Scientists have identified over 100 behavioural biases. These include: Confirmation bias, which means we search for information to support our views or beliefs and over-extrapolation, which occurs when we depend too much on a particular piece of information. The more common biases we all experience are fear, overconfidence and greed.

These biases may affect your behaviour, and therefore your success, as an investor.

A good example is the investor behaviour surrounding the global financial crisis. In South Africa, the stock market yielded returns of close to 36% per year for the 5 years prior to the crash in 2008. This lured investors in droves. Many investors paid overly inflated prices, by investing at the top of the market. Then followed one of the worst sell offs in market history. Approximately R9 Billion was withdrawn from property unit trusts and equity in the first three quarters of 2008 as fear-gripped investors exited the market. This meant that investors locked in their losses.

Try not to lose your head

Investors who remain calm during times of uncertainty are often rewarded for their patience. An investment at the peak of the market in May 2008, would have incurred significant losses by November 2008. But this is not the full picture as the market recovered 2 ½ years later and any investors who did not succumb to their emotions made back any losses and, in absolute terms, more than doubled their money by September 2016.

Don’t toss coins, pick marbles

Many people who invest use the same heuristics as they do for the random coin toss. This often results in a poor outcome. However, assessing information and using it where relevant (i.e. the marble in the bag approach) tends to yield better results.

How can we overwrite these biases? Believing the investment philosophy developed by your investment manager and understanding the unit trust you invest in makes it a bit easier to sit through market fluctuations. This allows you to benefit from the upswing when it does come around. Rational thought over emotional response is vital to a successful investment.

Find an investment strategy that is tailored to your needs, risk tolerance and time horizon. This will help take the emotional element out of your decision-making. Long-term strategies should not change if markets are volatile. An independent financial advisor can help you stay focused on your goals even when your emotions threaten to overpower you.


Top Ways to Save Money on your Next Move

There are many reasons people relocate. It might be starting a new job, a marriage, a divorce, just finishing college or simply wanting a change of scenery. With any long distance move also comes the added expense of transporting your personal belongings. This can run into a lot of extra money you might not have available. The good news is that there are many ways to save money on your next move. 

Hiring a moving company

All moving companies are not alike and all times of the year won’t cost the same either. If you’d rather use a professional moving company to transport your furniture and other items, the time of year, as well as the day of the week, can cost you more or considerably less. If you are able to make the move at a time of your choosing, the fall and winter months are most affordable. Also, booking the company for a date that falls during the week such as on a Tuesday or Wednesday will save you even more. Make sure that you acquire several written estimates from a few companies and do a background check before hiring.  

Deciding to rent a truck 

If you’ve decided that hiring a professional moving company isn’t something you can afford or that you’d rather transport your items yourself, the same rules still apply. For the best rates try to aim for a fall or winter move. If the choice is not in your hands, you can still book a date during the week to help reduce the cost of the rental. Again, it’s important to get a few estimates on not only the rental but also the rate per mile and other fees. 

Pack your items

Whether you choose to use a professional moving company or make the trip yourself, you can save money by supplying your own boxes and packing the items up yourself. If you are using a moving company, they often have specific quantities and sizes of boxes that you can use. Just follow the guidelines and you’ll save big on the packing. If you are doing it on your own you can pick up boxes for free at local supermarkets and retail stores. Just make sure you inquire long before you need to pack. This way even if a store only gets shipments once a week you’ll have plenty of boxes to cover what you need. In addition to the boxes, you can use towels, newspaper and coffee filters to help insulate your packages and prevent damage to delicate items while traveling. 

Bring only what you need

Moving is a wonderful time to think about downsizing.  If you haven’t cleaned out your garage, basement, attic and closets for quite some time chances are pretty good you have a lot more than you anticipated. Remember, everything you bring carries with it a price tag. There are several things you can do to reduce your load. One, you can host a yard sale. This benefits you in multiple ways. You’ll get rid of things you don’t really need or want and you’ll make money doing it, helping to reduce the cost of your move. If you have family nearby you could also give larger items away. Anything left over you can donate to charity.

Host a moving party

When you move and once the packing is complete it’s time to clean everything. This can consume a lot of time. Instead, make it fun and invite family and friends to help with the cleaning. Then once the house is clean and the boxes are loaded, it’s time to celebrate with food and drinks as a reward for their efforts. It’s a great way to say goodbye to those you love.