Be honest. After watching a show on shark attacks, would you eagerly book a beach vacation? Probably not. It doesn’t matter that the likelihood you’ll get attacked by a shark is tiny, because the human brain is wired so that recent experiences—good or bad—have the tendency to influence our judgment and our actions. This meddlesome quirk is what’s known in the behavioral economics world as availability bias. And when it comes to investing, availability bias can take a bite out of your portfolio.
Exhibit A: The global financial crisis of 2008 – 2009, which is still fresh in many investors’ minds. Seeking to avoid any more pain, many parked their money in investments they believed to be “safer” than equities, such as certificates of deposit and money market funds. But those investments have barely been treading water lately and could even be impeding investors from reaching their long-term financial goals, particularly when factoring in the impact of inflation.
What can you do? The video below provides some perspective on availability bias and why you shouldn’t let recent headlines influence a rational approach to investing.
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What are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.