Behavioural finance

Behavioural finance

Understand your biases for objective investing

Investing is an emotional undertaking with high stakes and a large degree of uncertainty. When the pressure is on, investors sometimes revert to reflexive thinking, relying on their own intuition, biases and heuristics for investment decisions. As an investor, you can employ a thoughtful, deliberate rationale to reduce your biases from having a negative impact on your investment results.

By understanding your biases and when they come into play, you can mitigate your gut reactions with logic and objectivity for more effective investing decisions.

 

Loss aversion

Clinging to underperforming investments because you are afraid to lock in a loss.

Employ objectivity to step back. Stop looking at the original cost and consider the investment’s current market value, future prospects, and the original rationale – does it still hold true?

 

Performance chasing

Investing in a manager or funds simply because it has been performing well.

Counter this by also objectively looking at the current market environment, your assets and how they work together as a whole.

 

Status quo

The desire to simply leave things the way they are and is related to regret aversion or conservatism.

Having a rationale for your investments, asset allocation and geographic mix helps sidestep this paralysis, because you have already effectively decided what to do.

 

Familiarity

Investing in what you know to the point where adequate diversification is lacking. For example, Canadians tend to invest too heavily in the domestic market.

One easy solution to gain exposure internationally, including outside the U.S., is to use either funds or ETFs.

Looking for more?

Follow our Becoming a wise behavioural investor series on RichardsonGMP.com and contact us to learn how we can help you make rational and effective decisions with your investments.