ITA Wealth Management

Fisher Investments - Mistake #8: “Experiencing over-confidence in your investing skills. When investing personal assets, it’s natural for investors to experience a lot of emotion as they watch the ups and downs of the markets. After all, their financial futures are at stake. This emotion typically brings a slew of cognitive biases into play, clouding investors’ judgment and hampering their ability to make rational, objective decisions.”

Here is Fisher’s discussion of how to avoid mistake #8. “Let’s face it: the human brain is not wired for investing. Our Stone Age incestors evolved and survived by focusing on whatever helped them hunt and gather food. Their biases shaped their beliefs, creating and reinforcing their understanding of the world.”

“The fact is, like our ancestors, we see the world today through a screen of biases. For example, most investors will focus on their successes and try to forget the mistakes they’ve made, consistently confirming their personal views rather than maintaining objectivity.”

“On particular shorcoming of investors is their innate tendency toward overconfidence. We naturally put up barriers that allow us to forget the mistakes we’ve made in the past. At the same time, we tend to focus on the successful investments we’ve made — which makes us overly confident. This leads to taking on excessive portfolio risks.”

“None of us are immune to these biases. That is why it’s vital to create an investing environment that is detached from emotion and relies on data and impartial analysis to make the right decisions for your financial future.”

A subtle message comes through in mistake #8 and it is, you are an emotional person when it comes to managing your own money and knowing this is the situation, it would be better if I were to manage it for you. While I do not have an exact match for mistake #8, I managed to come up with one that identifies both the problem and how to solve the overconfidence issue.

Wealth Management - Mistake #8: Investors do not monitor their portfolio adequately. Rare is the investor who can place their hands on the Internal Rate of Return (IRR) of their portfolio. An even smaller percentage of investors know how well their portfolio is performing with respect to an appropriate benchmark. The third measure, risk of portfolio, reduces the percentage to nearly zero. Even professional money managers will not monitor all three metrics for their customers. If one does monitor the IRR for the portfolio, IRR for the appropriate benchmark, and the risk of the portfolio, the issue of overconfidence vanishes.

Lowell Herr

Photograph: Otto

Premium Content subscription available for $6.99 per month.