18 February 2019

    Don't give your portfolio a shock

    Why investors can make poor decisions

    Calm, considered analysis and the compounding power of time were the themes of my monthly performance commentary released earlier in January. It’s also been my personal theme of the month, using the start to the year to do some quiet reading and thinking about the year ahead.

    One book I read was “Silence in the age of noise” by Norwegian explorer Erling Kagge. This book includes a number of short vignettes on silence with a recurring theme that true silent introspection can boost our creativity.

    We humans are terrified of silence. We really hate it. A study undertaken by psychologists at Harvard University and the University of Virginia, and cited by Mr Kagge, underline just how much.

    In the study university students were instructed to sit by themselves for up to 15 minutes in a sparsely furnished, unadorned room and “entertain themselves with their thoughts”. They were allowed to think about whatever they liked, the only rules being they should remain in their seats and stay awake.

    A majority reported afterwards that they found it difficult to concentrate and their minds had wandered, with around half saying they didn’t enjoy the experience. A follow up experiment sought to quantify just how much they didn’t like being “bored”. The results were, bad pun warning, shocking.

    A surprising choice  

    The follow up experiment had two parts. First the volunteers were asked to rate the unpleasantness of a shock delivered via electrodes attached to their ankle and asked whether they would pay money to avoid having to experience it again. Of course most volunteers were happy to pay not to get shocked again!

    In the second part of the experiment, which repeated the 15 minutes of alone time, the volunteers were left alone in the room with the electrodes attached to their ankles.  

    It turns out that with 15 minutes of alone time people do strange things.  Among those who had said they would pay to avoid getting an electric shock, 67% of the men and 25% of the women (take from that what you will!) opted to shock themselves at least once during the 15  minutes of silent, alone time. One of the women opted to give herself nine electric shocks over the 15 minutes. One of the men was so bored he zapped himself 190 times!

    How this applies to investing

    This pattern of behaviour is relevant to how we can behave as investors. Too many investors hate the “silence” of doing nothing in response to short term financial market moves.  The tendency we have is to do something to make the “pain” of our present emotions go away. This is like the volunteers in the experiment choosing the electric shock over short term boredom of being alone.

    Decisions made on the fly and under stress are unlikely to be good and yet often investors  do it. That’s like choosing to give our portfolio an electric shock.

    New Year’s resolutions can be hard but this one is easy. Give us a call, talk to an adviser and get a long term investment strategy you can stick with. Like I am working on, this year we can try and get a little more calm and serene, and develop the patience to let time do its magic. No more electric shocks for us!