How to avoid the dangers of doubling down
INVESTING is more than a numbers game, and the emotions it sparks can create a kamikaze investment trap.
Doubling down on investments that are falling in value is one irrational tendency, while investors can also overcommit by fixating on a promising investment, be it a stock or a start-up.
“Many investors rush into what they perceive as a once-ina-lifetime opportunity,” said Hugh Bickerstaff, the chief investment officer for the venture capital group Investible. “Or they get stubborn and refuse to writeoff bad investments, or even double-down in an attempt to escape.”
Mr Bickerstaff said it was easy to be talked into a deal proposed by a friend.
“This is often a recipe for disaster,” he said, adding it was best to use investment managers and funds with expertise in evaluating opportunities.
Financial Planning Association of Australia data suggests many Aussies just “wing it”: for more than one in five, poor planning is their main regret in relation to money.
Google senior financial analyst Riley Adams said one driver of rash investments was a reluctance to admit loss.
“Doubling down on an investment after it’s gone bad is a classic example of someone falling prey to the sunk cost fallacy,” Mr Adams said.
People fail to realise that a past cost that was already paid cannot be recovered, and Mr Adams said this led investors to throw in good money after bad.
He cited a rookie investment he made in an American radio stock [Sirius XM].
The stock tanked, but he added to his position, thinking the upside he envisaged would recoup his loss.
“I should have cut my losses and moved on to the next investment,” he said.
Australian Securities Exchange investors should tread carefully, Mr Adams said, because the sunk cost delusion was hardwired and universal. Base your investment decisions on objective expectations of future performance.
The founder of the wealth protection advisory DG Institute, Dominique Grubisa, suggested asking yourself a five-word question geared to the world’s most respected investor: “What would Warren Buffett do?”
“He would stay rational and unemotional,” Ms Grubisa said.
“He pares everything down to first principles and keeps it simple, takes out all of the excesses and emotion, and focuses on the numbers over the long-term.”