How To Avoid Poor Decisions and Investment Mistakes
Sometimes we use our emotions to make investment decisions. These are often influenced by media hype or even your neighbour’s opinion.
Sometimes with the benefit of hindsight, we realise these are not always the best decision. But by then, it’s usually too late……
Here are a few tips to help you to avoid any behavioural bias regrets:
1. Confirmation bias
You may become over confident due to subjective date. This can leave you highly exposed to unexpected shifts in the marketplace primarily due to lack of diversification.
How to avoid Confirmation bias
Challenge the “status quo” and gather information that forces you to evaluate your assumption. Weigh up all the advantages and disadvantages of the investment.
2. Bandwagon bias
This is herd mentality by gaining comfort in numbers by way of investing the same way as many others. In doing so, you neglect to assess whether the investment is right for you but rather invest because everyone else is.
How to avoid Bandwagon bias
Always analyse and think independently.
3. Loss Aversion bias
Investors begin to make poor and irrational investment decisions, whereby they refuse to sell loss-making investments in the hope of making their money back.
How to avoid Loss Aversion bias
The investor can view the current investment and the alternative in a neutral perspective to ultimately choose the right investment.
4. Restraint bias
It is very common for investors to overindulge in their “best investments” and fail to view other alternatives. In doing so they risk overexposure within their portfolio resulting in greater losses if unexpected changes in the market occur.
How to avoid Restraint bias
It is crucial to set limits on exposure to certain markets and make sure your portfolio covers an abundance of domestic and foreign investments.
5. Anchoring bias
Anchoring bias is the tendency of investors to rely heavily on past references or one piece of information when make a decision eg relying on recent share prices.
How to avoid Anchoring bias
Assess the validity of an investment on multiple fronts and from both a quantitative and qualitative standpoint.
To avoid all of the above bias behaviours, we recommend you consult with one of our professional financial advisor’s here at Bob Reus & Co. to ensure your portfolio remains exposed to weightings and diversification to meet your personalised risk profile.
Written by Leigh Gilbert