Why You Are Your Own Worst Enemy As An Investor

Lisa Smith, BA (Hons), CeFA
By

We all make mistakes when investing our money, but cheer up because those errors are not your fault.

Ongoing research by behavioural psychologists suggests that making financial mistakes is part of human nature and there’s nothing we can do to stop repeating our errors.

Research mainly bankrolled by financial firms has found eight human traits that can ruin financial plans without us realising.

  • Don’t hanker after anchoring – Retailers do this all the time. A product is advertised for sale at £500 and then the price drops to £350. Shoppers have the old price and a saving of £350 in mind when they buy without considering if the offer is a good deal. Just because the price of an investment drops does not make it good value
  • Don’t think glass half empty – If you are offered a share for £10, the risk is lost money if the market drops, but it could go up as well. Psychologically, investors think about what they stand to lose rather than how much they will gain
  • Cut your losses – Denial stops some of us selling loss making investments and moving in. Instead, we often make the loss worse by hanging on to poor performing stocks
  • Past performance is no guarantee – We’ve all read it a thousand times but just because a ploy has worked or failed in the past does not mean the strategy will keep on working. Make decisions on the evidence to hand and ignore your mind trying to influence you
  • Fake news – We all like to think others agree with our opinions, but we could be living in a bubble where the people around us believe the same things because no one from the outside has pierced out bubble of self-delusion
  • Don’t invest before meals – The research suggests investors can make weird decisions on an empty stomach
  • Don’t procrastinate – Putting off decisions can cost money so keep your eye on the ball and make sure investments are regularly reviewed – but don’t forget tinkering all the time is just as bad
  • Don’t be biased – It’s easy to value a personal judgment ahead of someone else, but sometimes other people are right and you are wrong

The bad news is you cannot escape human nature, but if you are aware of these traits, you can spot them trying to influence your decisions.

Leave a Comment