Don’t Let Emotional Investing Cloud Your Judgement
In the realm of finance, emotions can cloud judgment, especially during stress or market turbulence. Even seasoned investors must shield themselves from decisions fueled by feelings rather than facts. Below are some common investment biases that can cloud your judgement. Keeping these in mind can help you avoid making regrettable decisions regarding your hard earned money.
- Overconfidence: Investors tend to overestimate their ability to generate returns and underestimate associated risks. Recent success might be attributed to skill, but external market forces could play a role. Such overconfidence may lead to greater risks, with potential for both profits and losses.
- Herding Mentality: The tendency to follow others distorts risk perceptions, especially in up markets. Investors chasing higher returns may overlook volatility and the potential for loss. Prioritizing objective information is crucial, understanding that stocks don't move linearly.
- Aversion to Loss: In attempting to minimize the pain of a loss, investors might make decisions detrimental to long-term success. During market downturns, quick reactions, like selling stocks or over-allocating to safer assets, can lead to missed opportunities. Maintaining a diversified portfolio aids in weathering short-term losses and enduring market cycles. In 2008/2009, some investors sold down their stock funds in favor of bond funds and cash. By doing so, they missed out on the subsequent rallies that eventually took place and helped propel stocks to new highs.
- Anchoring: Relying heavily on specific information or recent circumstances can cloud judgment. Investors may anchor to a purchase price, waiting for poor investments to break even. Recognizing the fluidity of markets, seeking objective information, and adapting outlooks to changing circumstances are key.
- Pattern-Seeking Behavior: Our brains crave patterns, potentially leading investors to see false trends. Given the unpredictability of the future and the absence of consistent patterns, investors should set realistic expectations for portfolios and acknowledge the unpredictable nature of short-term market movements. Society is aging, and growth is slower, patterns of the past may be harder to apply to the future.
Truly understanding your risk tolerance and your threshold for loss can go a long way in helping you maintain a level head during times of market stress.
If you suspect your personal investing bias and emotions are interfering with your investment decisions, defer to the experts. Ask a financial professional to conduct an objective review of your portfolio, with an eye to performance and your financial goals. Together you can look for opportunities to grow your investments through disciplined investing strategies.
***BIO***
Aubrey L. Nestman, CRPC is a Financial Advisor & Business Financial Advisor with Nestman & Associates, a Platinum Services Advisor practice of Ameriprise Financial Services, Inc. in Dallas, TX. She specializes in fee-based financial planning and asset management strategies and has been in practice for 17+ years. Ameripriseadvisors.com/Aubrey.L.Nestman • 214-232-1639. Ameriprise Financial cannot guarantee future financial results.