Finance

A WINNER’S GAME

Andrew Fort Andrew Fort B.A. (Econ.) CFPcm Chartered MCSI APFS, Certified and Chartered Financial Planner, Fort Financial Planning

In many of my monthly articles I make reference to having a real investment strategy when investing money. Most readers would, I suspect, agree that they do not have a well thought out detailed investment strategy.

An investment strategy incorporates many different aspects. Indeed, I have often described it as the old-fashioned music hall act of spinning many plates at the same time. The more plates that continue to spin, the greater the likelihood is that the strategy will succeed.

One aspect of a successful strategy is in applying the principles of behavioural finance. Behavioural finance, a subfield of behavioural economics, proposes that psychological influences and biases affect the financial behaviours of investors and financial practitioners. In essence, it assumes that financial participants are not perfectly rational and self-controlled; this assumption applies to investors as well as investment managers.

There are many aspects to behavioural finance and this short article can’t address all of them. Some of the more common aspects include herd behaviour (following the crowd), self attribution (a fancy name for overconfidence in one’s own knowledge or skill), confirmation bias (a tendency to accept information that confirms an already held belief), loss aversion (being more concerned about the pain of loss than the pleasure of gains) and emotional (anger, anxiety or excitement) decision-making.

One of the conclusions of the mistakes that can follow as a natural result of our psychological behaviour with regards to investment can be taken from the game of tennis. As I write this article the second week of Wimbledon is taking place. Charles Ellis, a guru of the investment world, described professional tennis as a ‘Winner’s Game’. The outcome of matches is generally by winning points, not losing them. In contrast amateur tennis matches are generally won by the opponent making more mistakes than the victor. Experts win about 80% of the points; amateurs lose around 80% of the points. Amateurs are, Charles Ellis says, playing a ‘Loser’s Game’.

The power of this observation, which has a direct link to behavioural finance, is that for a successful investment experience it is wise to avoid other people’s mistakes. That is why a successful investment strategy encompasses many different strands (the spinning plates analogy) rather than concentrating on any one element. A successful investment strategy is indeed boring as it should avoid the (perceived) winners by concentrating on avoiding mistakes.

ffp.org.uk

FFP is authorised and regulated by the Financial Conduct Authority

Your Life, Your Money, Your Future

Trusted, professional, fee based advice We live in a complex world. At FFP we aim to remove complexity, replacing it with simplicity and clarity so that our clients can enjoy their lives without worry

Telephone: 01935 813322 Email: info@ffp.org.uk Website: www.ffp.org.uk

AHEAD IN THE CLOUD

Our real-time cloud accounting solutions present you with a full picture of your financial position 24/7, allowing you to proactively plan and respond ahead of tax deadlines. For a fresh take on your accounts, speak to Hunts

T: 01935 815008 E: info@huntsaccountants.co.uk W: huntsaccountants.co.uk @Hunts_Sherborne The Old Pump House, Oborne Road, Sherborne, Dorset DT9 3RX