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Demystifying common investing behaviors among Asian-Americans

Danqin Fang, financial advisor at Evensky & Katz/Foldes Financial Wealth Management
MoMo Productions | DigitalVision | Getty Images

Asian-Americans generally value education, are good at savings and legacy planning, and have a collective mindset to include extended family and multiple generations.

When it comes to investing, Asian-Americans make the same behavioral mistakes, with the same emotional biases, as any other ethnic groups. However, it is always a great learning opportunity to recognize and demystify the common investing biases and beliefs many Asian-Americans share.

The paradox of gambling and guarantee

As a Chinese-born certified financial planner, I am often approached by my peers to share the secret of investing of Asian-Americans, and it didn't take me long to identify two distinct groups: extremely aggressive or extremely conservative.

The aggressive investors visit casinos regularly with a short-term investment horizon. For some, it could be due to economic and political instability during their upbringing, resulting in a psychological lack of confidence in capital markets.

For example, someone who survived China's Cultural Revolution of the 1960s and 1970s will have a harder hurdle to overcome in trusting capital markets, will not feel at ease with investing long-term to ride out business cycles and might fear a system that could break overnight again. Being aware of this mindset opens the door for changes.

Others seek excitement in short-term speculating in the capital markets. If you can relate to that, be mindful to bet within your budget to avoid detrimental financial consequence if you lose it all. To win the game of investing, we will have to be in the market for the long run.

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Meanwhile, the extremely conservative group, seeking guaranteed protection on investments, is more attracted to guaranteed contracts.

For the most part, this type of investor is fond of cash value life insurance products and variable annuities with guaranteed riders. If this speaks to you, remember, historical data proved that the U.S. capital market has provided "guaranteed" long-term rewards for patient investors.

Also, based on research by Nobel Laureate Daniel Kahneman, an Israeli-American psychologist and economist, investors are loss-averse, not risk-averse.

The desire of Asian-American investors for "protection" can be hedged by having a long-term investing mindset. Put away our savings periodically into diversified portfolios and let it grow as the global economy expands over time. Take advantage of bear markets as buying opportunities at discount, and implement a disciplined re-balancing approach to avoid letting our fear take over during challenging moments.

Stock picking and tangible asset fanaticism

"Many Asian Americans think picking the next FAANG [Facebook, Apple, Amazon, Netflix and Google] stocks is the only way to invest in capital markets, " said Emily Chiang, an Arlington, Virginia-based certified financial planner and owner of EMC Succession Planning.

Undeniably, security selection is important, but research shows asset allocation and diversification matter. Let's face it, Warren Buffett is not placing all his eggs in one basket, and neither should any other investor.

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Diversified portfolios, aligned with risk tolerance and goals, can add tremendous value to avoid common investing pitfalls due to behavioral biases, including overconfidence — taking on riskier bets exceeding our tolerance level — and familiarity bias — avoiding diversifying into capital markets we do not know very well, for example.

Many Asian-American investors also over-allocate in real property investing and are not aware of the risk that loss could be catastrophic if things go wrong, such as the financial crisis in 2008. A prudent strategy is to set an allocation target for tangible properties and maintain our exposure over time.

Grapevine investing advice

It is common for Asian Americans to exchange investing ideas during gatherings of family and friends. Be cautious — such advice can easily be misleading if it is not from a prudent resource. In Asian culture, the group mindset doesn't leave behind any individual, whether right or wrong.

Additionally, past performance is not a good indicator of future returns. Therefore, do not feel missing out when you overhear someone talking about making a fortune from a stock in past months because the truth is that they will not tell you when they lose money. How foolish it is to chase past performance based on non-fully-disclosed information. Another truth is that good companies are not necessarily good stocks to buy because they can be overpriced at the moment.

Longer lives can pose extra challenges

A longevity study done in 2015 by Medical Research found that Asian-Americans live longer than other ethnic groups. As a result, they face greater challenges of retirement planning with the increased longevity risk. Plus, many Asian-Americans provide care for extended family and multiple generations, so it is more urgent for them to plan ahead and invest patiently and prudently.

With the awareness of common investing beliefs and biases, and with the knowledge of investing literacy, the Asian-American community can overcome its behavioral hurdles to become more patient, educated, and wiser investors. As Benjamin Franklin once said: "An investment in knowledge pays the most interest."

— By Danqin Fang, financial advisor at Evensky & Katz/Foldes Financial Wealth Management

(Disclaimer from Danqin Fang: The use of the term "Asian-American" or "Asian" in this writing is not meant to stereotype but to be more inclusive of people with different Asian regional heritage.)

Check out 5 Money Lessons Everyone Should Know by Age 30 via Grow with Acorns+CNBC.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.