Home' Be : Issue 7 Contents of making a decision that could lose
them money or the risk of missing an
opportunity that could make them
money? Studies have shown that
people tend to have the highest level
of regret for actions they didn't take,
rather tha n actions they did take."
For Hobart, behavioural
finance is what drives
a lot of market pricing.
" ere are times when
the market doesn't
cor rectly price risk. It's
this mispricing that a fund manager
tries to capture. We accept markets go up and down. at is
why you have cyclical and defensive stocks, but it is about the
relative pricing of those."
When people are fearful of the future, says Hobart, they
buy shares in defensive companies. " ey may be already
expensive, but they just keep buying them."
ere are phases when whole sectors of the stock market
are mispriced and other times, like now, when it is stock-
specific. "Recently we have seen a classic behavioural finance
event," he says. " e market was overly optimistic then it
became very pessimistic... and oversold the market. We have
seen a range of companies go through extreme repricing. e
whole market is now up 40 to 50 per cent from its lows."
By removing psychological factors, such as heuristic or
rule-of-thumb biases, from the decision-making, Hobart
believes investors are more likely to make logical decisions.
But, he says, they will str uggle to do it on their own. e secret
to growing wealth is having a well-disciplined investment
belief, strategic asset allocation, a long-term view and the
advice of a qualified financial adviser.
Recent developments have made people realise they
are flawed in the very thing they thought they were best at
-- cognition [or understanding what they know]. "Since the
global financial crisis, people have struggled to make sense of
what happened. People are looking at this because the idea of
rational economics fell apart," says says Michael Edwardson,
managing director of Psychologica, a corporate and
consumer psychology consultancy. When things happen
fast we are forced to make a decision
without time to reflect, and then certain
behaviours -- or, kneejerk reactions -- come
into play without us being able to control
them, he warns.
Over-confidence can also cause
problems. In that state, people tend not
to analyse the situation. However, if
they're in a more negative frame of mind,
they will often drill down into detail.
"For example, it is much better to read
a contract or think about a n important
decision in a more negative mood
because you tend to be more analytical,"
With risk, he believes that people catastrophise the risk,
become risk-averse and don't act at all rather than rationally
thinking that if they take a risk and lose X amount, it won't
be the end of the world.
Increased financial literacy is a move in the right
direction. "Education can make us sit back and
slow down. If you're not aware of it, you are liable
to fall prey. If you are aware, you can take time for
reflection," Edwardson says.
For most people, the best strategy is to take care
in buying shares by foc using on blue chip companies and
adopting a longer term view of at least five years, according
to Ken Br uce, Associate Professor of Financial Planning,
CQUniversity Melbour ne.
" e only thing that has held tr ue in the whole history of
the stock market is that, over time, share market prices are
growing and expanding. If you understand that a nd leave
your investments for a longer period of time, you are more
likely to succeed. If you want to make a quick killing, all you
are doing is gambling," he says.
Craig Hobart does see hope on the horizon. "After the
GFC, people are starting to understand what has happened
and are looking at their behaviour. For example, there was
a lot of money in shares and funds that didn't move during
the crisis. I don't know whether this was due to apathy or an
understa nding that when shares go down they do come back
up. I am hopeful it was the latter." ●
That's the advice
of Ken Bruce,
Planning. He also
says it's important
to ensure advisers
are licensed by the
members of the
Australia (FPA) so
they comply with
of ethics and
"Then look for
someone who seems
to be independent,
that is, a financial
planning firm that
doesn't sell financial
Also, aim to use an
adviser who is a
Planner (CFP), the
highest level of
says. "Paying a fee
for service is the
This is also the path
the FPA is pursuing,
that from 2012, fee-
Bruce believes it's
best to separate
the advice from the
For example, once
the plan is completed
the client can assess
it, then, if satisfied,
the adviser can put
the plan into action.
When choosing a financial
planner, select a professional
→ Charges a fee
for their service
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