Investors have some bad behaviors; and it is affecting their bottom line.
I have seen it myself; the pain of a loss is far greater than the joy of a gain. As a result, investors will sell a winner much too quickly to capture the gain and hang onto losers far too long to avoid realizing the loss.
Investors also look for information to back up their decisions rather than looking for facts that will contradict them. This process is called confirmation bias, similar to selective hearing.
Another bias people have is over confidence, this leads to over active trading and more problems. Believing you know exactly when to enter and when to exit the market means you have to be right twice – when to buy and when to sell – difficult to do.
Follow the crowd mentality. Without doing any research investors will make decisions with limited knowledge and follow the crowd right off a cliff. We all want to be liked and making decisions that go against the norm is difficult, after all, everyone can’t be wrong, right?
How do we avoid these common pitfalls? By not letting our emotions over rule our logic. Market cycles are full of peaks and valleys, emotions run the highest during economic uncertainty. Investor’s emotions are heightened and they revert to defensive behaviors during these times because they feel threatened.
Take a step back and view your portfolio with a critical eye, is it diversified? Does the risk level match your risk tolerance? How long will the money be invested for? In more cases than not; if you are working with a Financial Planner and choosing the investments together, your portfolio is representative of your financial goals.
If you are unsure, don’t hesitate to give me a call.
Have a great weekend,
Tracey
Source: Gary Gorr, advisor.ca
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