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www.insideHALTON.com | OAKVILLE BEAVER | Thursday, September 15, 2016 | 18 For more news, visit insidehalton.com/oakville-on. Behavioural finance and risk tolerance Beat cash emergencies Beat cash emergencies with a Cash Advance. with a Cash Advance. Available in-store, online, and wherever in-store you're reading ad. Available , onlinethis , and wherever you're reading this ad. 2460 Neyagawa Blvd 905-257-1917 198 Speers Rd 905-338-6000 www.moneymart.ca T MONEY MART ® is a registered service mark of National Money Mart Company. © 2015 National Money Mart Company. All rights reserved. his week's column will continue the discussion on behavioural nance. Speci cally, how individual investors overestimate their ability to assume risk. Another way of introducing the topic is suggesting human ego interferes with logical decision-making processes. Financial theory suggests investors are rational and they collect and analyze information in an unbiased logical way. Apparently, this is far from the reality of how decisions are made. The problem with humans is Dollars & Sense Guest Contributor Peter Watson Want to see your money doing better? Talk to us Watch your money grow with great rates from FirstOntario. 12 Month GIC st. 1.90 2.00 % 1.70 %* e-Savings up to Conditions apply. Rates subject to change. *Rates apply to registered and non-registered products. 30 Month GIC %* Original artwork by Michael Byers Call us at 1-800-616-8878 or visit FirstOntario.com we tend to vastly overstate our abilities. Behavioural research provides some interesting examples. Adults were asked three questions relating to their abilities. All answered they were in the top quartile with respect to their ability to interact with others. Surprisingly one quarter said they were in the top one per cent. The question of leadership ability had 70 per cent of respondents saying they were in the top quartile. As for their athletic ability, 60 per cent rated themselves as top quartile athletes. Reality check: everyone being `above average' is statistically impossible. However, it seems the ego is alive and well and resides in most in our country. Research shows there are several psychological processes that combine to generate awed selfassessments, but they are beyond the scope of this column. The question we need to be concerned with is how do we use this information to better understand the investing process? Many advisers ask their clients to complete questionnaires that, in part, are meant to understand their ability to assume investment risk. That is a signi cant issue because investing is all about accepting a level of risk. For example, if a new client overrated his or her ability to assume investment risk, the recommended portfolio might include a high per cent of investments in stocks -- individual stocks or stocks held within a mutual fund. If the stock market declined signi cantly, would the investor suddenly realize he or she is outside of his or her comfort zone and therefore sell all of their stocks at a signi cant loss? Investing in stocks means you invest for both the good times and the bad times. If you are not comfortable with a higher level of investment risk, then it is not suitable you invest a high per cent of your portfolio in stocks. Misjudging your risk tolerance can be devastating. Overestimating it and then panicking and selling investments at the rst sign of trouble is a common mistake that costs individual investors billions of dollars. Some might refer to selling in a panic as undisciplined investing. The truth might be without an initial acceptable risk tolerance, the investment should not have been made in the rst place. Either way, it is a very costly mistake and it happens far too often. Next week, my nal thoughts in this threecolumn series on behavioural nance will look at the lack of logic many investors have when evaluating their various investments. The overall theme of these three columns is to understand the realities of human behaviour and how they con ict with your investment objectives; which are to act logically and achieve acceptable long-term returns. -- Submitted by Peter Watson of Peter Watson Investments and Aligned Capital Partners Inc., MBA, CFP , R.F .P ., CIM, FCSI., Certi ed Financial Planner