This is the fourth post in a series giving our response to the FCA’s Call for Input on how to apply behavioural finance to help people make engaged investment choices more comfortably and confidently, and what role regulations can play in helping that to happen.
People buy stories, not investments. Without a supporting framework of fairytale-esque familiarity, diversification leads to discomfort. If diversification causes distress, it ceases to be such an obviously smart idea.
Behavioural Economics is a rapidly expanding field and everyday new research is being developed in academia, tested and implemented by practitioners in financial organisation, development agencies, government 'nudge' units and more.
The lowered valuations of assets is not important, only the value when you need to withdraw years in the future. You're much better to sit tight and wait, rather than to exit when markets are down.
Classical finance asks us to believe the investment journey does not matter. That is a mistake. Ignoring strong intuitions of the investors who have to endure the journey is always a mistake. When we lack comfort with our portfolio, we will act in costly ways to acquire it.
The trouble with cool heads is that they make plans for other cool heads, when in fact they should be making plans for an entirely different beast.
