Written by: Corey Janoff
Am I really going there today? How many people can I offend in this post? Everyone? Don’t worry, I’m not going to offend anyone (hopefully). The title is click-bait, sort of. But now that you’re here, you might as well read.
There is a reason I chose this topic for this week’s blog post. Last week, I wrote what I thought was a fabulous post about investing in real estate. However, you never got to read it (and never will). You didn’t get to read it because the compliance office that reviews everything before it gets published told me that I’m not allowed to write about real estate as an investment unless I’m a licensed real estate agent. I don’t agree with that logic, but they work hard to keep us from inadvertently violating any industry regulations, so I appreciate them looking out. I told my partners that I would write something less controversial this week, such as how your religion and political views impact your investment decisions.
When life gives you lemons, make lemonade.
Last week would have been the first week in two and a half years that we didn’t have a blog post, but Rachelle Vanderzanden came through in the clutch with a fantastic post about the gender wage gap in medicine. If you didn’t get to read it, I highly recommend it.
On to the topic of the week.
How Do Religious or Political Views Impact Investment Decisions?
After the 2016 presidential election, I remember getting such polarizing questions and thoughts from people I spoke to. Many people who voted for Trump had an optimistic outlook and believed his policies would propel the US economy and it would be great for investors. They often asked if they should be investing more in stocks at the end of 2016. Today they would argue that the stock market growth in 2017 and 2019 is a result of his actions (2018 was merely a speed bump along the way).
On the other end of the spectrum, many people who didn’t vote for Trump had a pessimistic outlook in late 2016 and asked me if we should be pulling money out of stocks and going more conservative. They would argue today that the stock market growth since Trump was elected is in spite of him, not because of him. It’s merely a continuation of the stock-market growth spurt that started when Obama was in office.
You read the two previous paragraphs and instantly developed an opinion on which one you believe best explains the last two and a half years. The moral of this story is we all have biases. Every single one of us is biased. If you don’t believe that you are biased, then you are probably twice as biased as the next person. The above anecdote is an example of confirmation bias. We seek out facts to confirm our beliefs and ignore stuff that contradicts those beliefs.
We have all heard of the studies where around 90% of people believe they are above-average drivers. 90% of us are part of that 90% (myself included), but laws of math only allow 50% of us to be above average. That means 40% of us are outright liars!
Most people think they are better than they really are at almost everything. It’s great that we have such strong self-confidence. But if we don’t recognize that it may be a false sense of confidence, it could get us into trouble when it comes to investing. The biggest negative impacts of our biases are taking on too much risk and lack of diversification.
Home Country Bias
Where you live impacts your investment decisions. Most investors tend to have a large percentage of domestic stocks in their portfolio. This means US investors tend to invest more heavily in US companies, while Canadians tend to invest more heavily in Canadian companies. Chinese investors have a lot of Chinese companies in their portfolios.
I could argue that the United States has the most robust investment market in the world – US stocks represent about half of the entire global stock market despite US residents only representing about 4.4% of the global population. However, with about half of all publicly traded companies domiciled in the US, the average investor located in the US has about 76% of their stock portfolio invested in US companies. If the goal is to be perfectly diversified, should we only have about half of our portfolios invested in US companies?
Our friends up north are even more pronounced in their home country bias. Canadian companies represent about 3% of global stocks, yet the average Canadian investor holds about 75% of his stocks in Canadian companies! Either they know something we don’t, or Tim Horton’s is putting a lot of Canadian Kool-Aid in their coffee.
These insights below by Openfolio.com are pretty fascinating. Where you live in America impacts the sectors you choose to invest in. If you live on the West Coast (aka the Best Coast), you are likely to have a larger percentage of your portfolio invested in technology companies when compared to investors throughout the country. If you live in the South, energy companies will likely be larger portion of your portfolio. See the below image for a breakdown of four major sectors.
People tend to invest in what they know and what they are familiar with. Tech workers tend to invest heavily in tech companies. People who work in medicine often invest in pharmaceuticals and medical device companies. Real estate agents like to invest in real estate.
When you see the interworking’s of companies in your industry on a daily basis, you tend to get an idea of which companies will likely be successful. For example, I know a number of physicians who invest in a drug company they know of because they believe the company is on the forefront of developing some great new drug. If/when it gets FDA approval, the company will likely explode in value (if it doesn’t get approved and the company runs out of funding, they could go out of business). There is nothing wrong with investing this way. It is important to understand the risk associated with any investment and with speculative investments, don’t invest more than you can afford to lose.
And Many More…
Everybody has different views of the world, based on a multitude of factors. Your parents. Your friends. Children. Where you grew up. Socioeconomic status today versus when you were a child. Occupation. The music you listen to. The TV shows you watch. Hobbies. Fears. Self-confidence. Are you a glass half-full or half-empty person? The list goes on. Oh, almost forgot to include your religious beliefs. Believe it or not, all these things shape our investment decisions.
You can google “Behavioral Investing Biases” and find zillions of studies on different biases that affect our investment decisions. There is no way to avoid these biases. However, being aware of them can help mitigate the risks they pose. It is important to not be too overconfident about any investment and remain well diversified to reduce the risk of a poor investment hurting your overall path to financial success.
This is not to be misconstrued as a recommendation for or against any particular investment. All investments involve risk of loss, including total loss of principal. Consult with your financial advisor before making any investment decisions.