3 Triggers For The Action Bias

"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring”. This quote by Billionaire Fund Manager George Soros perfectly sums up the perils of the “Action Bias”. Put simply, the Action Bias is the natural human tendency to go out there and “do something” with our investments, with the mistaken belief that the action taken will most likely have a positive outcome, in the form of enhanced returns. However, this most often ends up having the exact opposite effect. Most investors succumb to the Action Bias at some stage or the other.

Investors will benefit from knowing what some of the most common triggers for the Action Bias are. Armed with awareness, they will be better equipped to not fall prey to them. Here are the top four.

Success Stories

Not many investors can resist the siren song of a good success story! So, your buddy sold his house and pumped everything into the stock markets when they crashed in March 2020 – and he’s doubled his corpus today. Starry eyed with the prospect of making money ourselves, we get lured into taking action on our own portfolios. However, this can work to our detriment, as the time for action may just have passed - and we may end up investing at the end stages of the cycle of the same asset class in which your friend made a fortune. Beware of investing actions that are induced by the lure of success stories.

Seeing Red (in your portfolio!)

Notional (or un-booked) losses are the most common trigger for the Action Bias. Most investors have a ‘breaking point’ when it comes to stomaching portfolio losses. Beyond this point, they feel it is imperative that they don’t just sit there any longer and bear silent witness! We witnessed this in March last year, when hordes of retail investors pulled the plug on their equity investments when their portfolios had already fallen by more than 50% during the first lockdown.

The roots of this tendency actually lie at the stage of investment selection. All too often, investors enter investments without properly understanding their own risk profiles, or the risks associated with that particular investment. Resultantly, they usually end up selling out reactively when their investments head south, only to replace these investments with lower risk investments – this is akin to selling an asset after prices have fallen, and replacing it with another asset that can never really recoup the losses made in the first one. If you’re getting spurred into action simply because your portfolio has slipped into the red – think again. There needs to be a fundamental basis to what you’re about to do with your investment. Oftentimes, holding on and waiting for the cycle to revert is a much better idea.

Expert-speak

Investors tend to attach an inordinate amount of significance to ‘expert speak’, or the words uttered by so called experts on television. However, countless studies over the years have actually proven that “experts” in all fields (investing included) seem to get it wrong most of the time! Expert views can change overnight, but that won’t reverse the losses you may incur by following their advice. Financial Markets have notoriously short-term memories – and you’ll likely see the same expert back on TV again; only making a different prediction this time! For best results, rely less on TV experts and more on your own common sense, and the advice of a trusted Financial Planner who has your interests in mind.

Surging Markets

Surging markets can trigger mass euphoria – which can in turn spur even dormant investors into action. Tales of investors who took out loans and bought real estate after prices had doubled or tripled – or stock market averse investors who jumped in after the NIFTY surged 2,000 points are well chronicled. If your action is being triggered by a surge in asset prices – think again. You’ll likely end up on the losing side in the long run. With the NIFTY hovering around the 17,500 mark as on date, this is something you should be doubly watchful for