While market conditions and external events do play a role, the primary driver of investment success is often the investor’s own behaviour
The saying “You are not a failure until you start blaming others for your mistakes” by renowned basketball coach John Wooden holds significant truth, especially when evaluating the performance of our personal investment portfolios. It’s a common tendency among investors to attribute poor results to external factors such as the choice of stocks or funds, the portfolio managers, market conditions, or other events beyond their control. Although these elements can influence investment outcomes, the primary factor affecting portfolio performance often lies in the investor’s own behaviour. As investment expert Benjamin Graham famously noted, “The investor’s chief problem, and even his worst enemy, is likely to be himself.”
Recent investment trends, including significant inflows into thematic, sectoral, or small-cap funds, suggest that certain behavioural biases may already be influencing investor decision-making. Recognising these biases is crucial for investors to overcome them and make better investment choices. As psychotherapist Nathaniel Branden stated, “The first step toward change is awareness. The second step is acceptance.” While various investor biases can lead to suboptimal decisions and unsatisfactory outcomes, some are particularly prevalent during a bull market like the one we are currently experiencing. Here are a few common behavioral biases:
Overconfidence Bias: This bias leads investors to believe they possess more knowledge about the financial markets or specific investments than they actually do, causing them to disregard expert advice or factual data. The impressive returns on equity investments in recent years have left many investors overly confident in their decision-making skills, often without acknowledging that much of this success is due to the general bull market. Such overconfidence can be dangerous when the markets reverse course, as it may prompt investors to over-allocate to stocks or sectors they think will continue to perform well.
Anchoring Bias: Many newer investors, especially those who entered the market post-COVID-19, have come to expect unusually high returns from equities, based on the exceptional gains seen in recent years. This anchoring can lead them to expect annual returns of 20 per cent or more, assuming such performance is typical. Setting expectations at these levels is risky because it may influence financial plans that later prove unrealistic when market conditions change.
Herding Bias: Also known as the bandwagon effect, herding bias is common during bull markets, where many investors follow the crowd. The prevailing optimism in a bull market creates an illusion that stock prices will only keep rising, leading to irrational decision-making. This mentality can inflate asset prices and eventually result in significant losses when the market corrects itself.
Recency Bias: This bias causes investors to place too much emphasis on recent events while ignoring long-term historical data. For those who began investing after the COVID-19 pandemic, the past few years have shown consistent market growth, leading to the false impression that downturns are rare or manageable. To navigate these biases, investors should strive to make informed and rational decisions, especially during periods of strong market growth. A long-term investment strategy can help counteract the temptations posed by behavioral biases. Regularly investing through systematic investment plans (SIPs), maintaining a disciplined asset allocation and setting realistic expectations are practical approaches to reducing the impact of biases on one’s portfolio. Ultimately, the key to successful investing lies in acknowledging that our behaviours and mindsets significantly influence outcomes.
(The writer is head of Investment Products, Share Market; views are personal)
