Imagine you're stuck in traffic. Some drivers keep changing lanes, thinking they're moving faster, but often they end up behind you again. Investing is very similar. Constantly making changes in your portfolio can feel satisfying but usually doesn't get you ahead.
What is Action Bias?
"Action Bias" is the urge to act—even when it's better to stay still. In investing, this means trading or making decisions impulsively, especially when the market gets volatile. It feels natural to do something, but it can hurt your returns.
Why Doing Less Means Earning More
Research shows that investors who frequently trade underperform those who patiently hold their investments. In a well-known study, frequent traders earned 6.5% less per year than investors who bought and simply held their investments over time.
Football and Investing: A Surprising Lesson
Consider goalkeepers in football. During penalty kicks, staying still gives them the best chance to save goals. But most goalkeepers dive left or right because staying still feels like doing nothing.
Investors face the same problem. When markets fall, we panic and feel we must sell. This action feels better than doing nothing, but it often makes temporary losses permanent.
How to Beat Action Bias:
Here are three simple strategies:
1. Automate your investing: Using methods like Systematic Investment Plans (SIPs) or Systematic Transfer Plan (STPs) removes emotions and ensures regular investing.
2. Check your portfolio less often: The more often you look, the more anxious you'll feel. Checking quarterly or even annually reduces unnecessary actions.
3. Embrace planned inactivity: Think of your investments as planting seeds. You don't dig them up frequently to check their growth. Instead, give them time to grow and flourish.
Conclusion: The Power of Doing Nothing
Investing success isn't about always doing something. Often, it's about knowing when to do nothing. The market will always have ups and downs, but patience and calmness can turn these fluctuations into opportunities.
Remember, successful investing is more about managing your behavior and less about making constant changes. So next time the market makes you anxious, remember: sometimes, the best thing you can do is simply sit there and let your investments grow.
