Avoid four potential post-pandemic pitfalls with these investment strategies
New report discusses how savvy investors position themselves for the post-pandemic landscape.
The market took investors for a wild ride during the pandemic, starting with the abrupt end to the bull market in March 2020, and an unanticipated return to bull market territory in successive months. Many investors may have overreacted, emotionally and cognitively, to these ups and downs.
“Emotional reactions to market activity can be detrimental to an investor’s overall plan,” said Mike Taylor, Wells Fargo Investment Institute (WFII) investment strategy analyst. “Advisors generally try to guide their clients not to follow their emotional gut reactions out of fear. You want to make informed decisions.”
As the post-pandemic market begins to take shape, a special WFII report, “The New Landscape: Investing in Post-Pandemic Markets,” helps guide investors through trends that WFII expects will be impactful.
To help investors process their reactions to the shifting trends, Taylor suggests keeping an eye out for four common behavioral biases that can affect investment decision-making.
1. Regret aversion
Governments have injected an unprecedented amount of liquidity into the global economy with pandemic-related monetary and fiscal policies. WFII is tracking trends that indicate that these policies will remain in place possibly into 2022.
At the same time, investment professionals have noted that many may be opting not to participate in the markets. One explanation for this is the idea that any money placed in the market is high risk, and investors may avoid or delay decision-making out of fear of making mistakes, which can be characterized as regret aversion.
For those who are holding on to excess cash, who have perhaps saved their stimulus money, or are just waiting for the right time to invest, regret aversion could be the cause of their paralysis — and it can be costly.
“If you have money on the sidelines, maybe it is time to revisit your plans for it,” Taylor said, “and if you have never developed an investment plan, maybe now is time to consider one.”
Money invested over time avoids losses, due to inflation, Taylor added.
2. Status quo bias
The fear of making mistakes can also be characterized as a fear of inaction. That same fear can manifest in investors as a bias toward making sure everything stays the same, or status quo bias.
“People who exemplify status quo bias can be people who select a fund and never change anything, or who maybe only invest in their company stock and don’t really consider what to do with it, nor put any thought into investing,”
Taylor said that the accelerating market trends including the shift toward teleconferencing, telemedicine, and contactless payments, likely will have broader economic implications for the market for years to come. Investors who avoid status quo bias, and opt to respond to these trends, are positioning themselves to take advantage of potential key opportunities.
3. Home country bias
“Gathering more information can make you a savvier investor. Try to recognize there is always more than one way to look at things.” — Mike Taylor, Wells Fargo Investment Institute investment strategy analyst
WFII expects the post-pandemic world to have opportunities for global market investments, with many outlooks indicating that emerging markets showed resilience during the pandemic.
However, according to the International Monetary Fund, investors commonly exhibit a bias toward selecting stocks with companies and industries located closer to home. This is not just an American phenomenon. Although concentrating equity exposures locally can be appropriate, there are reasons to look beyond local borders. For instance, continuing dollar weakness is identified in the recent WFII report.
“Something investors should think about, beyond economics, is politics,” Taylor said. “Anecdotally, we have seen a lot of investors exhibit home country bias. Globalizing one’s portfolio can also add a diversification element.”
4. Confirmation bias
In the post-pandemic world, people are experiencing a barrage of information, and many are being selective about what information they receive, Taylor noted.
“We can all be guilty and have our favorites,” Taylor said. “So you may find yourself exhibiting confirmation bias, looking only to sources that confirm what we are predisposed to believe.”
Confirmation bias can cause investors to miss out on opportunities in a changing world. For instance, the report notes that there is currently confidence in commodities, but that may change in about a year.
“Gathering more information can make you a savvier investor,” Taylor said. “Try to recognize there is always more than one way to look at things.”
Checking biases can potentially benefit investors, especially with the ongoing unknowns of the markets.
“Make yourself aware of common biases, and how they can impact your decisions,” Taylor said. “We don’t really know our emotions until situations present themselves that test our reactions.”
All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. The risks associated with the representative index asset classes discussed in this report include: Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation, prepayment, extension and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. High yield fixed income securities (junk bonds) are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
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