Why emotions interfere with investment decisions

It explores important facts investors may be missing regarding more recent positive market developments around the world, and provides straightforward strategies to help investors reposition their portfolios with an appropriate allocation to Canadian and global equities and fixed income.

According to Franklin Templeton’s recent Canada investor survey hosted on the Angus Reid Forum, a third (34%) of Canadian investors acknowledge that they take an emotional approach to investing and another quarter (26%) are unsure of whether they do or not.

“Canadians are still looking at equities through ‘bear market glasses’. The dramatic market drop of 2008 continues to stand out in investors’ minds, even as the market has climbed back up,” said Ronice Barlow, head of strategic planning & business development – Canada, Franklin Templeton Investments Corp.

“Many investors who instinctually moved money out of equities into traditionally ‘safe’ investments a few years ago are finding that many of these strategies have been offering a marginal or negative real return because interest rates are so low.”

In fact, when Canadian investors were asked if they currently view fixed income assets (including bonds and bond mutual funds) as a “safe haven” for their money, 61% indicated that they do, according to the January 2013 Canada investor survey. Also, over a third (35%) believe that fixed income assets offer the best returns in today’s markets. These views on fixed income may be keeping many investors on the equity market sidelines, and further from their long-term financial goals, in a period where the S&P/TSX Composite index has risen about 68% since the market bottom in March 2009.

Time to Take Stock explores three behavioural finance concepts as a window into why investors hold the beliefs and make the decisions they do:

Availability bias. Decision-making is greatly influenced by what is personally most relevant, recent or dramatic. For investors, this can mean that the unprecedented events of the 2008 financial crisis have left a stronger impression than the 68% gain in the S&P/TSX Composite index since the market bottom.

Loss aversion. The pain of loss is generally much stronger than the reward felt from a gain. The desire to avoid market losses has driven many investors to move their money out of stocks into low-yielding cash equivalents such as money market instruments or Guaranteed Investment Certificates (GICs).

Herding. An innate tendency to follow the crowd makes it easy for investors to get caught up in “what everyone else is doing.” This can cause investors to lose sight of their long-term goals and pull their money out of equities at the wrong time or sit on the sidelines in cash while the market rises. More than half of Canadians surveyed (59%) report that they don’t pay attention to what others are doing when investing, yet the exodus from the equity markets paints a different picture.

The online survey was conducted on January 15 and 15 among 946 randomly selected Canadian adults who currently invest in stocks, bonds or mutual funds, or have done so in the past five years, and who are Angus Reid Forum panelists. The margin of error is +/- 3.05%, or 19 times out of 20.