Anchoring Bias

Adviser Insights by Elmarie da Silva

Most investment mistakes are not caused by a lack of knowledge. They are caused by how decisions are made. One of the most common and costly of these is something called anchoring. Anchoring is a behavioural bias where we rely too heavily on a specific reference point when making decisions. In investing, that reference point is usually linked to a past number, the price you paid for an investment, the highest value your portfolio once reached, or a level you believe it should return to.

This is where a very familiar thought pattern starts to form: “I’ll sell when it gets back to where I bought it.” It sounds logical. It feels disciplined. But in reality, it is neither.

The challenge with anchoring is that it ties your decisions to the past, while markets are always moving forward. An investment does not “know” what you paid for it. It does not adjust its behaviour based on your expectations or your personal reference points. Its value is driven by current conditions and future prospects. When decisions are based on past prices, they become disconnected from what actually matters and that is where that capital can work most effectively going
forward.

For South African investors, this becomes even more complex. Investment performance is not only influenced by the underlying assets, but also by factors such as currency movements, local economic conditions, and global market shifts.

An offshore investment, for example, may decline not because the underlying assets are weak, but because the Rand has strengthened. Similarly, a recovery in value may be driven more by currency movement than by real growth. Despite this, investors often remain anchored to a single number, the price they paid or the value they once saw, without fully considering what is driving the change.

In practice, anchoring leads to hesitation. Investors hold onto underperforming investments for longer than they should, waiting for a recovery to a previous level. At the same time, they may ignore better opportunities, simply because reallocating would require accepting that the original decision did not play out as expected. Over time, this creates a shift in focus.

Instead of asking, “Where should my money be invested today?” the question becomes, “How do I get back to where I was?” That shift is where value is lost.

The real cost of anchoring is not always obvious. It is not just about holding onto an investment that is underperforming. It is about the opportunity that is missed elsewhere. Capital that remains tied up in the wrong place is capital that is not working effectively. In the South African context, there is also a tax consideration. Investors often hesitate to sell because of Capital Gains Tax. While this is a valid consideration, it can sometimes lead to decisions being delayed unnecessarily.

Avoiding tax may feel like a win in the short term, but if it prevents better allocation of capital, the longterm cost can be significantly higher.

This is where structured advice becomes critical. A well-constructed portfolio does not rely on individual investment recovery points. Instead, it focuses on overall allocation, long-term objectives, and where capital can be used most effectively at any given time. The conversation shifts away from past performance and toward future positioning. That shift removes the emotional attachment to specific numbers and replaces it with a more strategic perspective.

The market does not reward patience in the wrong place. It rewards discipline in the right strategy. Because the past is not a strategy but the decisions you make today will determine your future outcomes.