We all remember March, 2020, when much of the world shut down. The markets were on a roller coaster ride to put it mildly, and investor emotions were off the charts.
The uncertainty that COVID-19 brought to the world was indeed next level. Face masks and social distancing were prevalent topics as maintaining our health became even more of a focus than normal.
Our minds wandered to the health of our portfolios as Q1 concluded with the S&P 500 down 20% in just the first 3 months of the year.
Emotional Bias. What is it and how does it affect me financially?
Wikipedia defines emotional bias as a distortion in cognition and decision making due to emotional factors. Translation — human beings often make bad decisions when emotions are the catalyst behind their choices.
According to a Vanguard study, investors who deviated from their initial retirement fund investment or didn’t stay their course, trailed the target-date fund benchmark by 150 bps or 1.5%. That’s a lot.
At CG Capital, an advisory firm which I co-founded in upstate New York, we were introduced to a fair number of people last year who placed trades in their portfolios largely in response to emotional bias. Some of the back testing showed significant losses as a result of these actions. Had they stayed the course, the S&P went from -20% at the end of Q1 to +16.26% by the end of 2020.
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