As a financial adviser, Mr Milton concludes that it’s important to educate clients about these types of unfavourable habits in a bid to steer them away from following a similarly painful path to financial ruin.
Rule 7: Don’t obsess daily
Not all investors – or their advisers - think long-term and investors’ fears can be exacerbated by overly checking and re-checking performance of markets and funds.
Dave Penny, managing director of Invest Southwest, says he has numerous stories of financial advisers obsessively checking the value of the FTSE index at regular intervals on the golf course.
This particular characteristic has become a major talking point for behavioural finance academics, many of which argue the monitoring of constant price changes is often a trigger for irrational emotional responses.
Plenty of the industry’s greats agree with this line of thinking. Whereas Warren Buffett is known for having no Bloomberg terminal on his desk, Walter Schloss avoided computers altogether, choosing instead to monitor price quotes in newspapers.
Meanwhile, David Einhorn’s prefers to take time out after the sudden arrival of bad news, mainly because he isn’t able to think rationally in the immediate aftermath of a bombshell.
Rule 8: Nothing is a ‘dead cert’
Another flaw Mr Penny occasionally notices is that of placing clients with different attitudes to risk into the same investment plan, simply because it has been a good performer in the past.
A couple of years ago he recalls one adviser telling him he put all his clients in corporate bonds “because he knew they would do well in the future”. In another case, he remembers meeting a client who was advised by her previous adviser to invest in two property funds. She eventually saw the value of her portfolio halve, despite initially being reassured her investment was safe and diverse.
Those familiar with the stock market will know that certainties don’t exist, particularly as the statistics and forecasts used by the majority of investors have regularly come up short in the past.
Corroborating this theory was research compiled by IMF economist Prakash Loungani in 2000. By looking at GDP forecasts around the world between 1989 and 1999, Mr Loungani found of the 60 recessions that occurred in this period, economists had failed to foresee 58 of them. The financial recession of 2008, too, can be added to this list.
Stay dull, diversified and long-term
Given the uncertainty surrounding global economies and equity markets, many view diversification as a fundamental tool to protect investors from volatility. Mr Penny, who describes his style as “extremely dull”, uses asset allocation models to provide clients with a suitable number of viable options.
