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5 mindset shifts to give your portfolio a nudge

Patrick Nolan  |  17 Jan 2018Text size  Decrease  Increase  |  
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Forming good investment habits and breaking bad ones can be difficult, but the following mental tweaks may help you move in the right direction.

By now, some of you may be suffering from a mild case of resolution-fatigue and an overload of helpful suggestions on how to make them, how to keep them, and why they don’t work. Investment habits are usually in the mix, whether it’s contributing to your superannuation, reading your financial statements or sticking to your asset allocation plan.

Instead of feeling bad about making well-intentioned promises and not keeping them, I’m proposing a slightly different tack. Use the first weeks of the new year to focus on your mindset. Change your thinking, and the behaviour will follow.

The following are subtle but powerful “mental tweaks” that can help you make more thoughtful investment decisions all year long. They’re drawn from behavioural science and supported by learnings from discussions with thousands of financial advisers.

1. Accept that you don’t have all the answers

While it’s good to have convictions, it’s important to recognize that we tend to favour information that reinforces our held beliefs. You can challenge these confirmation biases by proactively seeking other points of view and really listening.

If, for example, you’re convinced that interest rates are going to rise (as many investors currently are), find a contrarian and ask him or her to explain. Even if you ultimately decide that your position is the right one, understanding the opposing case may help you pinpoint any holes in your rationale. That can motivate you to incorporate investments that will work should your thesis be proven wrong.

2. Get comfortable with being uncomfortable

It’s hard to make progress without a few missteps. Accepting the reality that losses are part of the process will help you prepare for and ultimately tolerate them better. So, if you like stocks, know that it’s going to get ugly sometimes.

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Before it does, identify investments that can play defence during a decline--then own them consistently. Yes, it may feel uncomfortable when they’re holding you back month after month. But it’s like setting off on a mountain climb with your safety ropes firmly secured: cumbersome much of the time, but you’ll be glad you have them if your footing slips.

3. Focus on information that matters to you

It’s easy to get sucked into the daily dance of the Dow or S&P 500 Index. But it truly has nothing to do with you and what you want to achieve long term. Keep your eye on whether you’ll have enough to spend throughout retirement, or send your children to university.

Unlike the headline noise, you’re trying to grow your money judiciously--participating in some stock market upside but also being aware of what you can afford to lose. Resolve not to feel jealous when the S&P 500 is breaking records and your portfolio is lagging.

4. Ask “what if?” more often

This is about stress-testing your portfolio, imagining a range of likely--and unlikely--scenarios that could impede the success of your plan. What if Australian or US stocks take a big hit next year? What if they keep climbing? What if inflation rises more quickly than I expected? What if I lose my job or have to stop working? What’s “the perfect storm” for my portfolio, and what would I do if it happened?

These scenarios may or may not have an impact, but it’s important to consider possible pain points, see where you’re vulnerable, and be prepared.

5. Change your mind about one big thing this year

The status quo bias is another behavioural trait that often keeps us from acting in our best interest. This is a preference to keep things the way they are or stick with a decision you made earlier, no matter what.

For example, it could be tempting to believe that stock market performance will continue upward indefinitely, and thus extrapolate that simply owning large-cap stocks is the sure pathway to success. That ignores the historical reality of market cycles. Like the confirmation bias, this type of myopia can lead to trouble.

Ultimately, you’ll want to prepare for something new to become the next leader. Changing your thinking is the first step to making it happen.

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Patrick Nolan is the portfolio strategist within BlackRock’s Portfolio Solutions group. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

Patrick Nolan is the portfolio strategist within BlackRock’s portfolio solutions group.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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