Page 18 - Advice Matters Magazine - FWP - Dec 24

5 Psychological Traps Hurting

Your Investments

Market trends aren’t the only factors affecting How can we overcome behavioural biases?
your investment portfolio—behavioural biases The good news is that you can manage your behavioural
can significantly impact your returns. biases and minimise their impact on your portfolio.

These psychological tendencies, like confirmation bias and 1. Awareness
herd mentality, often lead to poor investment decisions.
Becoming aware of behavioural biases is the first step.
Behavioural biases are mental shortcuts or blind spots that This awareness can help you identify triggers that lead
can mislead us, even when our choices seem rational. to biased thinking, enhance self-reflection to question

Understanding the most common biases and their impact your instincts and reactions, and improve your ability to
on our investment decision-making is crucial for achieving regulate emotional responses like fear and greed, which
the best possible returns. often drive biased decisions.
1. Confirmation Bias 2. Stick to a plan

Confirmation bias means that we seek out information Create a clear investment plan based on your goals and
that confirms existing beliefs or investment decisions while risk tolerance. Regularly review this plan to stay on track
ignoring contradictory evidence. This can lead to a lack of and avoid impulsive decisions.
diversification and increased risk exposure. For example, a 3. Get different opinions
person who holds significant shares in a company might Don’t rely on just one source of information. Seek out
ignore all negative news about that company.
different perspectives and understand the reasoning
2. Overconfidence Bias behind recommendations. This helps you see the bigger
This bias leads investors to overestimate their ability to picture.
predict the market or pick winning shares. It can result 4. Review regularly
in excessive trading, higher transaction costs, and lower Schedule regular reviews of your investment portfolio to
returns. ensure your investments are aligned with your goals and

3. Loss Aversion adjust for any changes in the market or your life.

People always feel the pain of losses more acutely than Investing can be challenging, especially when dealing with
the pleasure of gains. As a result, investors may hold onto behavioural biases. This is where a Financial Adviser can
losing investments for too long in the hope that they will be incredibly valuable.
rebound rather than cutting their losses and reallocating Advisers provide expertise and objectivity, helping you
their capital.
navigate and overcome these biases. They guide you
4. Anchoring Bias through a disciplined investment process, regularly review
Investors often fixate on a particular piece of information, your portfolio, and offer diverse perspectives to ensure
such as the price at which they bought a stock, and use it better decision-making.
as a reference point for future decisions. This can prevent
them from adjusting their strategies in response to new
information or changing market conditions. Don’t leave your financial future to chance—work with a
Financial Adviser to confidently navigate the complexities
5. Herding Behaviour of investing and achieve your long-term goals.
Herding behaviour occurs when individuals follow the
actions of others instead of making independent decisions.
This behaviour can lead to exaggerated market movements
driven by mass sentiment rather than fundamentals.

18
DECEMBER 2024