Brainwashed by behavioral biases? New study includes effective ways to keep your investing wits

According to a recent study by Charles Schwab Asset Management, recent world events like the global pandemic and numerous natural disasters have contributed to a surge in behavioral biases among investors, leading to some scary decisions.

Now in its third year, the so-called BeFi Barometer measures financial advisers' observations of behavioral biases within their client base.

According to the 2021 study, observations of each bias increased at least 11 percentage points over the previous year, with an average gain of 18 percentage points across options.

As in previous years, recency bias - in which an investor is easily influenced by recent news events or experiences - was the most widely observed, followed by confirmation bias - seeking information that reinforces existing perceptions - and framing, in which a person makes a decision based on the way information is presented.

The study also asked advisers which techniques were most effective in helping their clients stay objective and stick to their investing strategies. The top five are:

Taking a long-term view

At Savant, we take an evidence-based approach to investing, which uses historical data, research and our firm's knowledge of risk and return to maximize the likelihood of achieving our clients' desired outcomes. Inherent in this approach is patience and a long-term view.

Goals-based planning

For some investors, investing is all about the returns. Goals-based planning focuses specifically on the client's goals.

This mindset helps us to keep our perspective during volatile markets and can keep anxious investors from trying to time the market.

Implementing a systematic process

Having a process requires discipline, and investors are better equipped to apply discipline during episodes of market volatility if their expectations are realistic, long-term and if they understand why some investments have higher expected returns.

Staying calm

We've seen many crises affect stock prices over the years - not the least of which occurred during March of 2020, when the markets tanked over COVID news. Just as consistently, however, we've seen the markets reward disciplined investors. Reacting to a crisis by leaving the market is just another form of market timing.

Increasing portfolio diversification

About half of the global opportunity set in stocks exists outside the U.S. The other half includes developed ex-U.S. and emerging markets. Because there's no predictable pattern of the best-performing countries or asset classes, it's impossible to identify in advance which will come out on top.

The world has experienced many crises and we will no doubt experience many more. Focusing on what we can control - such as keeping our emotions and our behaviors in check and tuning out the headlines - can help us all relax, focus and work toward a better investment experience.

• Edward Cruickshank, CFP, is a financial adviser and team lead in Savant Wealth Management's Lincolnshire office.