Every day, you’re faced with decisions. Whether they’re small, like what to have for breakfast, or big, like whether to sell your house, your emotions will be influencing you.
We all have subconscious biases, which can drive our decision-making, whether we realise it or not. This is equally applicable to your financial choices. But emotionally charged behaviour could impact returns and mean you make decisions with your heart, not your head.
Read on to discover six biases that could be driving you, and how taking financial advice could help to add balance.
Emotionally charged decisions are impacting investors’ returns
Market volatility and global conflict can affect your investment returns. But rather than these external factors themselves, one of the biggest risks to your investment returns might be the way you respond to them.
In fact, Quilter reports that emotionally driven decisions cost investors an average of 3% in lost returns each year. These losses can rise to 6-7% annually during times of high stress or steep volatility.
Understanding why this behaviour happens can help you recognise it. Working with us, you can start to lessen the impact these biases could be having on your investment decisions.
1. Loss aversion
According to Behavioral Economics, people feel losses twice as strongly as they appreciate gains. This can mean you start to avoid risk altogether, perhaps by selling investments after the markets fall, or storing a large proportion of your wealth in cash.
In turn, this can impact the growth of your portfolio, and you could miss out on opportunities. Working with us can help you understand and manage this behaviour, to shift your mindset to a more balanced approach.
2. Recency bias
Under the assumptions of this bias, you could find yourself thinking that whatever’s happened recently will continue. So, if markets have fallen, you expect more falls. If they rise, you expect continued growth.
This could see you selling on impulse after downturns or chasing strong performance after more resilient periods.
A long-term approach to your finances can give you a much clearer picture, while reacting to immediate events could see you lose out on growth opportunities.
3. Overconfidence
You’re comfortable making decisions, and you’re used to them being right. And this can translate into overconfidence in terms of your investments. If you’ve had some success, you can easily feel that you are an expert with investments and don’t need to receive any advice or support from a financial planner.
However, regardless of past or recent investment performance, speaking to a financial planner can help you make informed decisions about the future.
4. Status quo
Sometimes the problem isn’t action, it’s inaction. While you might feel that you’ve “sorted” your financial plan, it really shouldn’t be treated as a once-and-done event. Reviewing and revisiting your plan regularly with a financial planner can help to keep it up to date and aligned with your lifestyle and current circumstances.
For example, if you’ve changed jobs, you could consider consolidating your pensions, or you may have retired and would like a different balance to your investment portfolio.
Doing nothing can lead to missed opportunities, while a regular review can identify chances along the way.
5. Herd mentality
Following the crowd can be tempting, as investors often assume others know something they don’t. This can lead to panicked behaviour, such as selling when markets fall, or buying when they’re high, without any real plan.
Herd mentality can feel comforting, rationalised by the idea that if everyone else is doing something, there’s no harm in following suit.
Working with a financial planner can help to guide rational decision-making based on your own circumstances, which could support better outcomes.
6. Confirmation bias
Confirmation bias occurs when you look for evidence that supports your existing beliefs.
This means you could potentially ignore any information that goes against them, leading to you making investment decisions based on partial insights.
Working with a financial planner can help to cut through this bias, taking a purely practical approach to evidence that can support decision-making.
Get in touch
Understanding your biases can help you to reduce their power, as you can adapt and adjust your behaviour accordingly.
Taking financial advice helps to remove the emotions from your decision-making, as a planner will offer perspective to counterbalance this. While ultimately your investment decisions are your own to make, good financial advice will help to guide you.
We’re here to help. Please get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.