Investment Principles and Action Bias - Capital Asset Management

A sporting world record was created in London on February 27th 2022.

As the Carabao Cup Final between Liverpool and Chelsea remained goalless towards the end of extra time, it seemed like the game was headed for a penalty shootout. Dramatically, Chelsea manager, Thomas Tuchel decided to make a late substitution and bring on his reserve goalkeeper, Kepa,  who was known to be a specialist at saving penalties.

The decision proved to be the worst one possible. Kepa failed to save a single penalty, had 11 goals scored against him and then proceeded to miss his own penalty kick, resulting in defeat for his team.

It went down as the worst substitution in football history.

Action Vs. Inaction

If only Kepa had been aware of the statistics around penalty kicks and acted accordingly, there could have been a different outcome. Researchers studied 286 penalty shootouts and found that 49% of keepers dived to the left, 44% went right and 7% stayed in the middle.

However, 40% of penalty kicks were hit straight down the middle, with roughly 30% each going left or right. Therefore, if they were playing for statistical advantage, a goalkeeper should stand in the middle and not dive at all. But almost none do.

This has been explained as ‘action bias’, where we want to be seen to be doing something, anything at all, even though we know that it’s often better to do nothing. 

Imagine the fans and the coach’s reaction to the goalkeeper if he simply stood in the middle and didn’t make a heroic dive in an attempt (usually a failed one) to save the shot? 

Despite the weight of evidence against it, we are conditioned to prefer action to inaction. 

Investing

The same blindspot can mislead us into taking action when it comes to investing through volatile periods. Whether it’s Brexit, the Pandemic or war in Eastern Europe, the continual flow of news, followed by periods of market volatility, unleashes an urge to do something, just avoid ‘doing nothing’!

This primaeval desire comes from the ‘fight or flight’ mentality which forms part of human DNA. For as long as our species has existed, we learn that, if we sense danger, we should be prepared to take action – either run away or stand and fight.

However, short term investment market volatility is not a saber tooth tiger!

Recent examples

In March 2020, at the height of the coronavirus panic, a well-known wealth management firm advised their clients that “this time it’s different” and that they should move their funds to a ‘low-risk portfolio’ – after the flash crash had happened. This advice cost clients 30% in lost investment returns and had a negative impact on many investors’ retirement plans.

A more recent case was an article in the Daily Mail on February 24th 2022, recommending investors sell 50% of their portfolio and hold cash instead. On the face of it, with the Russian invasion of Ukraine and multiple other challenges facing the global economy, perhaps a reasonable suggestion. 

The Data

However, a glance at the historical data confirms that this is likely to be a bad move. Looking at the worst 48 day periods since 1928, the returns when tracked through to the year-end were positive almost every year. In other words, investors would have been better off staying put – doing nothing. 

We’re still early in the current year but already markets around the world are recovering It seems that, once again, attempting to guess the future direction of the markets and selling up is looking like a bad move. 

Don’t Just Do Something, Stand There

All of this feels counter-intuitive and you could be forgiven for wanting to take action, make changes, sell funds. After all, the media is full of unsolicited advice that appeals to our senses and grabs our attention – and yet is nothing more than ‘clickbait.’

However, as your financial planner, we’ve worked with you to build your personalised family ‘roadmap’. This map or financial plan has already factored in short term investment market volatility – it never comes as a surprise to us.

“Surprise is the Mother of Panic” – Nick Murray

We’ve used sophisticated forecasting software, based on data that goes back over 100 years and, using history as our guide, models what can happen during global recessions, depressions and even world wars.

There are few guarantees in life but applying a rigorous data-driven approach, together with a proven investment philosophy, based on Nobel prize-winning research, is your best chance of long term financial success.

So, although it may sometimes seem that by not advising you to sell your portfolio or move to ‘safe investments’ we’re inactive, we have proven that a positive decision to ‘stick to the plan’ and avoid taking action is usually the best one to make.

Just ask Chelsea’s goalkeeper!

Alan Smith
CEO

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