Why your first market experience may be holding back your investments

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What is starting-point bias

Starting-point bias occurs when investors allow the conditions at the beginning of their investment life to influence their long-term approach disproportionately. You may end up far too optimistic about equities, for example, if you start in a bull market. You will lean towards risk-averse, low-return investments when you start in a bear market. This psychological anchor distorts asset allocation over years despite changing market circumstances.

Why it hurts your returns
The danger of the starting-point bias is that it restricts diversification and long-run growth. An investor who started in the early 2000s when equities were high might have had enormous exposure to shares and underpriced risk, which resulted in nasty corrections later. In doing this, someone who began investing shortly after the 2008 meltdown could have been too cautious and lost out on one of the most extended bull markets in history. Riding the mood of the market when entering as a means of guiding your approach is sure to end up with out-of- whack portfolios that never come close to meeting future objectives.

Indications that you might be affected
If you are continually rationalizing your present composition in terms of when you first invested, then perhaps you're victims of starting-point bias. These old standbys, such as having too much in cash in the portfolio since you began to invest in times of crisis, or being overweight in some particular asset class since that asset class did well when you first started, are telltale signs. Knowing these symptoms is the first step towards overcoming the bias.

How to avoid starting-point bias
The best method to avoid starting-point bias is to employ a disciplined goal-oriented strategy rather than reacting to prior market conditions. Your long-term investment goals, your investment time horizon, and your ability to tolerate risk should determine asset allocation, not where you stood in the market. Regular monitoring of your portfolios and rebalancing keep any single asset class from growing too big or too small over time. Reduction of emotional involvement on your point of entry can be attained by seeking a financial advisor or by investing in systematic investment plans (SIPs).

Building an earthquake-proof designLastly, eluding the starting-point bias is all about injecting resilience into your portfolio. Instead of being stuck where you began, stay nimble and change as you mature. Diversification into equities, debt, and alternative assets shields you from the volatility of markets, and regular rebalancing ensures your portfolio stays in line with your goals. By breaking free from the psychological anchor where you began, you empower yourself to invest sensibly and effectively.

FAQs

Q1. Is starting-point bias identical to market timing?
No. Market timing is the deliberate attempt to enter or exit on the basis of forecasts, while
starting-point bias is an unconscious anchoring of decision to the conditions at the time when
you originally invested.

Q2. How often should I rebalance my portfolio to avoid such biases?
Most advisors recommend rebalancing annually or semi-annually, or as often as your asset
mix differs substantially (i.e., more than 5%) from your desired mix.

Q3. Can SIPs actually help eliminate this bias?
Yes. Systematic Investment Plans smooth out entry costs over the long term, keeping your
investment choices from being unduly influenced by one particular phase of the market.