Do you only invest in GICs or a handful of stocks because they are familiar? That could be because of familiarity bias. When it comes to investing, you may miss out on opportunities just because they are unfamiliar to you which could interfere with reaching your financial goals.
On this page you’ll find
What is familiarity bias?
Familiarity bias is when people tend to favour things that are familiar to them, while showing less interest in things that are unfamiliar. In the case of investing, this often means investors tend to invest in what they are already familiar with and avoid unfamiliar investment opportunities.
For most of us, investing isn’t a full-time job. We don’t have time to understand the pros and cons of every possible investment. As a result, when making investing decisions, we tend to simplify things by gravitating towards what’s familiar. For example, we may only invest in companies with brands that we recognize, or in companies our family and friends invest in.
How can familiarity bias affect your investing?
The trouble with familiarity bias is that just because an investment is familiar doesn’t mean that it’s well-suited to your financial goals. Sticking to what’s familiar, whether it be familiar countries, products, or industries, can leave you undiversified. This can make your portfolio riskier than it needs to be.
Diversification is the process of selecting a mix of investments whose prices don’t always move in the same direction. For example, stocks and bonds historically tend to move in opposite directions. A mutual fund or ETF can also help you diversify by exposing you to a variety of stocks or bonds from different countries or industries, depending on the make-up of the fund. If you diversify, you lower the risk of your portfolio. You’re less likely to lose a large portion of your investments just because one company, or one part of the market, isn’t doing well. Learn about more reasons to diversify.
Our Getting started resources will help you get familiar with several common types of investments. The right investments for you depends on many factors, such as your risk tolerance, investment needs and time horizon.
How can you protect yourself from familiarity bias?
There are several steps to help you overcome familiarity bias when investing, including:
- Consider new opportunities – Encourage yourself to view unfamiliar investment products, countries, or industries as new opportunities to further diversify your portfolio, while making sure the investment is not overly risky. Find out more about types of investments.
- Research the investment – When reviewing new investment opportunities, research them and use objective criteria such as interest rates and fees to make decisions, rather than familiarity. Learn more about how to evaluate companies when buying stock.
- Speak to your financial advisor – You can learn more about adding new investments to your portfolio from your financial advisor who can also help you rebalance your portfolio to achieve your financial goals. Learn more about working with an advisor.
Summary
Knowing what familiarity bias is, and how to overcome it, can help you adjust your investing decisions to reach your financial goals. Here’s how it works:
- Familiarity bias is the tendency for people to favour things that are familiar to them, while showing less favour to things that are unfamiliar.
- It can make you more likely to invest in products you already know and avoid ones that you’re unfamiliar with.
- Valuing what’s unfamiliar, doing research, and speaking to your financial advisor can help you overcome familiarity bias and find investments best suited to your needs.
