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Negativity Bias: Is your Strategy Prudent or Overly Cautious?

There has been a proliferation of advertisements recently encouraging people to be more bullish with their investments. A Questrade ad, for instance, where we observe a guy admiring his friend’s new apartment, and shares that he hopes to achieve similar success. His friend's response: "Dude, hope is not a plan..." A ad featuring Matt Damon regaling the viewer with tales of courage, waxing on the mindset of champions, concluding his bold speech with the phrase: "Remember this, fortune favours the brave..."

To those with little investing experience, these ads might make one think that the world of investing is for intrepid, unflinching risk-takers. In some ways this is true, but a broader view of the world of investing would reveal a more varied range of risk-aversion than you would think.

Anyone who has casually engaged with investing has likely noticed that the emotional reaction to loss is much higher than the emotional reaction to gain. This tendency to fixate more on past mistakes is a cognitive bias almost all humans share – it's what the field of psychology calls Negativity Bias.

Negativity bias can be seen in how condominium boards tend to manage their reserve fund investments. Condominium boards tend to engage various external sources for reserve fund investment planning – engineering firms, financial advisors, property managers and even owners in the building. Given the various parties involved in the conversation, you would think there would be a variety of investment strategies used by various condominium boards.

Surprisingly, we have seen across a wide cross section of condominium boards that the majority of investment strategies are the same. The typical strategy we have seem is to invest in standard fixed-return GIC products only.

These investments are currently offering about a 2% return. This percentage has stayed the same, despite construction inflation rate rising to 5% and higher over the last few years. This 3% deficit is the responsibility of the owners to fund.

Could this status quo approach that most condominiums adopt still be good enough?

Could the cautious approach be eroding potential fund growth?

At Vertical City Institute, we are focused on helping condominium boards manage their reserve funds and manage building operations effectively. Our solution allows condominium boards to see the long-term impact of their investing approach and compare with different approaches that they can calculate, using our forecasting tool. To learn more about this tool, please continue reading here: 🌐Vertical City Toolkit - Reserve Fund Forecasting

Disclaimer: Please note that any information provided is for educational and informational purposes only and should not be construed as investment advice. It is important to seek professional advice before making any investment decisions.


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