By Ben Hobson, Markets Editor, Stockopedia
Whether you act on impulse or are overly risk averse, emotions influence every aspect of financial decision making. In many cases, it leads to the wrong decision which can cost you money.
Behaviour triggers can affect both the novice and the seasoned investor. But certainly, as a private investor, you’re more likely to act on emotional triggers due to the nature of your portfolio and your level of responsibility over its success.
Checking in on your investment portfolio out of fear, boredom or greed is often the worst thing you can do. As the old saying goes, you haven’t lost or gained any money until you’ve sold.
So, to help you avoid the dangers of emotional investing and see larger returns from your portfolio, here are some top tips…
Confidence is a double-edged sword
More relaxed or experienced investors may succumb to the temptation of ‘riding the bull’ as long as possible to maximise their profits on reselling. However, a decline can always be around the corner, the story may change and luck can run out – especially in more volatile portfolios.
Investor arrogance comes as a result of overestimating the power of a share and waiting too long to act if, or when, the investment case changes. It’s the same story with underestimating the power of a share.
Striking a balance between the two is key. Understand when greed is taking over, to make sure you’re making sensible decisions grounded in fact. It’s also important to bear in mind that devastating societal changes or black-swan events – like we’ve seen with COVID-19 – can utterly shift the landscape, so don’t bet too much on the past strength of a stock.
Resist the urge to react
Private investment is a time-consuming activity and with your own money at stake, it’s easy to become oversensitive to market movements.
However, checking your portfolio too much or becoming too emotionally wrapped up in market shifts means you’ll be likely to miss the opportunity to reap the rewards of holding on for an uptick in value. Each trade also costs you in feeds which can add up over time and eat away at returns.
To anchor your thought processes and protect against that urge to react instantly to market movements, make sure you build and refine your own investment strategy, then apply it constantly across your portfolio.
Mix up your investments
Diversifying your private investment portfolio across different sectors can lower your risk and boost your chances of seeing higher returns. This also helps to build your experience and confidence in buying more risky or volatile shares.
Having investments in different sectors can provide you with the peace of mind for cautious investors; as well as helping to facilitate the drive and confidence to begin dealing in some of the more volatile shares.
Diversifying your portfolio is about creating a safety net for yourself, should one of more adventurous investments go awry, and leave you less likely to be led by emotional triggers.
Don’t always follow the crowd
It can be easy to forget the media is a tool for investors and not a personal financial adviser. More often than not, the hot stock on the block is anything but and investors can fall victim to the hype.
When you’re searching for your next stock, or have one recommended to you, you should always look into it yourself and make sure it fits in with your investment strategy.
To find stocks that are more likely to deliver higher returns, opt for factor investing. This method analyses a share’s core fundamentals – like value, quality and momentum – over time to project future rises or dips in value, reducing the impact of behavioural biases.
Cover your blind spots
Investors are particularly prone to attention blindness. The stress of managing a private portfolio and potentially losing large sums of money can cause temporary lapses in judgement.
It’s easy to think you have all the right expertise and knowledge needed to make an informed decision, but sometimes heightened emotions cause you to miss things that were right under your nose.
As humans, we possess the conscious ability to rationalise and reason which allows us to calculate risk and reward. But sometimes our instinct to act can override this part of the brain and our “monkey mind” takes the wheel, leading to impulsive emotional responses.
Before making any decision about your portfolio, always take the time to stop and interrogate all the facts in front of you to avoid expensive mistakes which you later regret.
