When it comes to the world of investing, what you don’t know can hurt you. Michael Roberto, author of Know What You Don’t Know, explained the ramifications of unawareness to me when we spoke on The Goldstein on Gelt Show. Mr. Roberto explained, “There are certain blinders that we have that cause us to downplay certain risks, and this could be really problematic.”
One of the reasons for this may be “information bias.” This is when you look at information that confirms your preexisting beliefs rather than examining the information with an open, unbiased mind. Information bias can have a serious effect on investing because you may end up discounting important risks simply because they contradict your current position on a certain stock rather than confirming it.
Your investment team
When I asked Mr. Roberto what investors can do to avoid these pitfalls, he answered that being aware of these biases can help.
Just as a company has a management team to help with its decisions, individual investors should use a financial advisor as an objective reviewer to understand the ramifications of their financial decisions.
Consider how you make your financial decisions. What biases do you have? If you can’t answer the question, consider calling a financial advisor to help you evaluate your investment methods and portfolio.
To watch a video of the complete interview with Michael Roberto, click here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published October 1, 2014.