Spring Cleaning Your Investments? Read This First

After a long winter, Spring has finally arrived. The world may be feeling uncertain, but changing seasons can still bring feelings of hopefulness. Similarly, a birthday or a big life event often gives us the feeling of a fresh start. That sense of a new beginning, however, can often lead people to take actions or make plans that may ultimately be unrealistic. New Year’s resolutions, anyone?

It’s a phenomenon known as the fresh start effect or the fresh start fallacy: the belief that setting goals or starting over at certain points in time allows us to erase past failures or habits and succeed. It’s something investors can identify with, too. But, as with most concepts related to behavioural finance, it helps to understand this belief and how it could affect your long-term goals.

Understanding the fresh start fallacy

In 2014, researchers observed that people were more likely to tackle their goals at certain times, like at the beginning of a new semester or new year. They found that these milestones create a new mental timeframe that pushes previous mistakes to the past and drives people to become more aspirational.¹

While this fresh start mindset can be motivating, it can also lead to unfulfilled goals and possibly even feelings of disappointment. “It’s really not supported – the idea that a specific time is any more potent than any other time to make change in your life,” says Dr. Randy Paterson, a Vancouver psychologist and the creator of the How to Buy Happiness course, which helps people better understand how money impacts their lives.

When people set goals around specific dates, there could be a couple of underlying factors at play, according to Paterson. One of them is procrastination. “Deciding that you’re going to make a fresh start on a certain day essentially has a subtext – unwritten, unstated, but real. And the subtext is: not now,” he says. “The second factor is that usually people are trying to do too many things at once. Come April 1, or whatever it might be, I’m going to make this mammoth set of changes in my life. That’s not how change occurs. Change generally occurs step-by-step, bit-by-bit.”

How a fresh start mindset can impact investing decisions

Creating a clean slate can be exciting, but doing so without analyzing past decisions could undermine our efforts and prevent us from achieving new goals. With investing, people could become overly optimistic about a new stock or strategy during fresh starts and overlook their own past performance.

This could potentially lead to making rash decisions. To avoid getting swept up in feelings of overconfidence, it could be helpful to stick to a consistent strategy – like dollar-cost averaging, where you invest regular, fixed amounts of money in assets that fit your goals, time horizon and risk appetite.

If you do feel tempted try something dramatically different during a fresh start time, it’s important to remember past missteps. Maybe you sold investments when the market dipped, only to see prices quickly recover, or perhaps you bought the latest hot stock and it crashed. “Learn from those mistakes, and realize that whatever you did didn’t work, so don’t do that again,” Paterson says.

Making your changes stick

Creating a lasting change can be difficult, no matter the time of year. But there are tools investors can use during moments of renewal to increase their odds of long-term success.

For instance, Paterson says, setting up investments in a way that doesn’t require constant effort or willpower can be helpful. He gives the example of saving for retirement through a Registered Retirement Savings Plan (RRSP). “A lot of people will say: ‘Well, I’m going to try and restrict my spending, and then everything that’s left over at the end of the month is going to go into my RRSP.’” A better approach could be to set up pre-authorized contributions (PACs), he says, so that you’re making a one-time change rather than a series of adjustments, which can be more daunting.

Another strategy is to tell someone, like a close friend, about your intended goal and give that person permission to ask about your progress. “There are really no consequences. But simply stating an intention to someone else can be helpful,” Paterson says.

Whatever the goal, he cautions investors about making big changes all at once, especially without fixing past mistakes. “If there’s a change you plan to make in the future, then you have to actually start now and begin making the plans for it.”