Morningstar's best research on behavioural finance
How to become the best investor you can be.
I did some research about the net total return that investors receive. It has long been conventional wisdom that equity markets will return 10% p.a. to investors over the long run.
Theoretically, with a $100,000 initial investment and $1,000 additional investments every month, in 20 years (with returns reinvested), you would have $1,391,009. Of course, this scenario completely ignores all the realities of investing - including poor behaviour.
Poor behaviour is one of the largest detractos from investors' total returns.
Behavioural economics concludes that human decision making is often irrational despite the best intentions by investors. In economic speak, it is not profit maximising. As investors, how do we prevent ourselves from self-sabotaging our financial goals? Part of this is self-reflection and recognising what kind of investor you are.
When we are confronted with something stressful or frightening, we tend to react in one of two ways – fight or flight. We feel compelled to act. But when it comes to investing action often has poor consequences. The more we trade the more likely it is that we are faced with poor tax outcomes and higher transaction costs. We also tend to buy investments that do worse than what we’ve sold.
Below are resources investors can use to help them prevent poor investing decisions.
How to earn 1.7% more a year than the average investor: Mark outlines how changing your investment approach can make a significant difference in returns over the long-term.
Why Aussies are better investors and the lessons we can learn from their success: Shani looks at the latest Mind the Gap study that has results split by region. Australian investors do better than most, and this could be due to our gigantic share of superannuation assets. What are the characteristics of superannuation that we can take lessons from to do better with our investments outside of super?
Do you know why you are investing?: New research from our Behavioural Insights team suggests that many investors should clarify what drives their investment decisions. Shani goes through the practical steps from the research that you can implement into your investment strategy and approach.
Investing without emotion, or how to train your lizard: Three pointers for how to regain control of your decisions.
Active or passive? Neither works for many investors: Mark goes through why investor behaviour makes it very difficult for active managers to outperform. The same behaviour causes many passive investors to train the very indexes they purportedly are seeking out.
The four best ways to learn from investment mistakes: We’re bound to make mistakes when investing. James Gruber exposures the world of chess, music, medicine and golf to find out the best ways to learn from our mistakes.
Why we trade: Sarah Newcomb, Ph.D, goes through the variety of reasons that we make trades. Understanding and recognising this behaviour is the first step to mitigating it.
How to behave like a winner: This Investing Compass episode covers the ways that you can increase your odds of better outcomes. You can also listen on Apple Podcasts, Spotify, or anywhere that you listen to your podcasts.
