Making biased free financial decisions is challenging. As investors, we’re forced to confront our own emotions each time we make decisions. And, biases crop up and quietly work against us. Overconfidence, anchoring, and confirmation biases are some of the powerful forces that can cloud our judgment and lead to costly financial mistakes. To safeguard against these influences, one of the most important skills investors can develop is the ability to separate facts from opinions.
This post will highlight the difference between facts and opinions and then provides some tips and tools investors can use to manage their emotions while making financial decisions.
The Difference Between Facts and Opinions
Facts are objective statements that can be measured or verified. Opinions, by contrast, are subjective interpretations layered on top of those facts. For example:
| Fact | Opinion |
| XYZ Stock dividend yield is 4.5% | 4.5% is a good yield |
| My stock portfolio lost 2% last month | Losing 2% in a month is a bad rate of return |
| ABC Company charges 1% per year for investment advice | 1% per year is a high price to pay for investment advice |
| GDP fell 1% last quarter, and the S&P 500 rose 3% last quarter | The economy is heading into recession, and the stock market will fall next year |
Facts are raw data. Opinions interpret those facts, sometimes rationally; but more often emotionally.
How Investors Fall Victim to Opinions
Investors frequently mistake opinions for facts. A common example is media commentary about investing. A headline that says “Markets are headed for trouble” is an opinion, not a fact. Similarly, when a friend says a stock is “too expensive,” that’s a subjective judgment, not an objective truth. Giving weight to opinions instead of relying on the facts leads to “blowing in the wind” financially instead of sailing to a destination.
When you give weight to opinions, you allow your boat to be pushed by the environment around you rather than sailing in your chosen direction. We can’t control the weather, just like we can’t control the direction of financial markets. But we can control our sails, rudder, and how prepared we are for storms (and sunshine) when they inevitably happen to us.
Strategies to Separate Fact from Opinion
The first step to overcoming biases based on opinions is awareness. When you encounter information, ask: Can this be measured or verified? If the answer is no, you’re dealing with an opinion. Other strategies include:
- Rely on data, not headlines: Focus on parts of your wealth management you can measure such as, asset allocations, active returns, cashflow, etc rather than predictions.
- Seek facts, not forecasts: Facts are consistent across sources and support truth, while opinions vary widely.
- Write it down: Before making a decision, write out the facts you know to be true and base your decision on those facts alone.
Focusing on What You Can Control
Markets are unpredictable, and many risks are outside any investor’s control. However, what you can control are things like your savings rate, your asset allocation, your investment costs, and your discipline. Strategies to support these factors include:
- Automate contributions to ensure you continue investing regardless of market conditions.
- Stick to your Investment Policy Statement to avoid emotional decisions.
- Focus on costs: Lower fees are a guaranteed way to improve long-term returns.
- Review but don’t react: Monitor your portfolio periodically, but avoid knee-jerk changes based on short-term movements. No tactical trading based on market expectations!
A Stoic Investor?
Another way to overcome our emotions when it comes to wealth management is to become more “stoic”. A stoic investor might have the following characteristics:
- Calm under pressure
- Focused on what you can control
- Guided by principles, not opinions
- Accept uncertainty as a part of life
- Commit to discipline
How our Family Office Helps
It’s tough to stay rational when it comes to investing, especially when the world around us seems wild and “out of control”. And, its true, many of life’s most important outcomes are not guaranteed. Plus, life is full of uncertainty. But, to find great success, whether as an investor, parent, or leader, its important to focus on the things we can control and not be swayed by the emotions swirling around us.
Our family office has built a platform designed to help our clients become better investors by supporting them with services that help them stay focused on what truly matters. We aren’t pitching you the hottest stock tips, we aren’t coming to you with fancy tax strategies. Instead, our goal is to provide our clients with financial clarity, simplicity, and focus. We aim to support financial peace of mind. If this sounds appealing to you, please contact us for more information.
