When investing, there are plenty of hurdles that can trip us up. Identifying the right portfolio for our own appetite for risk, choosing the right fund and the best investment product all make a difference.Unfortunately, too, built into us all are some hidden biases that can trip up even the most experienced investors. At least if you’re aware of them, you’ve some chance of minimising their impact. We’ll take you through some of the most common biases that are in-built within us all.
Investment Advice Donegal
Investing Blindspot #1: Loss Aversion
As a species, humans hate losing far more than we enjoy winning. Research has gone as far as to say that the pain from losing hurts twice as much as the joy from winning. An example of this is walking through the park and you stumble across a €20 note – brilliant! You’ll really enjoy this windfall for a few minutes. However, in an alternative scenario, you drop €20 while walking through the park… in this case, the annoyance will gnaw away at you for twice as long as the earlier situation.
When it comes to investing, our decisions can be overly influenced by small losses that we suffer. The pain of accepting a loss can be too great. Too often it stops an investor from cutting their losses, selling a stock and moving on. The pain of defeat clouds their judgement, and this can increase the impact of those losses.
Investing Blidspot #2: Recency
Here’s a test – write down your ten favourite movies. The chances are that you’ve included a pretty good movie that you saw recently. But if you were instead given a list of all the movies that you’ve seen, there’s no way that this recent movie would have made the list. That’s recency bias – placing too much emphasis on recent events, as opposed to looking at a longer-term picture.
When investing, investors give far too much credence to recent events. An example is where markets take a short-term dip. Even if this is after a prolonged growth period, investors are often overly influenced by the recent dip instead of staying focused on long-term trends. This results in people taking poor short-term decisions that are heavily influenced by recent events.
Investing Blindspot #3: Anchoring
Anchoring bias is where you use old information as a key input to a decision, even though it might be completely irrelevant at this point. An example is the investor who says, “I bought those shares at €40; I’m not selling them below that”. Why not? The stock market doesn’t pay attention to what you paid for a share; it has no bearing on the future. Your decision to keep or sell an investment should be based purely on the future outlook, not some irrelevant past detail.
There are many other biases at play, we’ve just touched on some of the main ones here. The key to investing is often staying out of our own way, as our biases and behaviours can really undermine our potential for success.
Investors that are successful tend to stay focused on their plan, maintain a long-term perspective and keep saving throughout all market conditions. They also are aware of the need to watch their own behaviours. They remind themselves not to try and time the markets and they check their biases.
Remember, the enemy of successful investing is often ourselves… That’s where our work as an impartial, trusted adviser will really help you – we’ll see your blind spot and help you manage it.
Investment Advice Donegal
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