We all like to think we act purely on logic and balance, but money is an emotive topic. We share a Financial Adviser’s tips on how to look past our emotions and make smart choices.
Hugh Breach is a Chartered Financial Planner who specialises in pensions and retirement planning, investment management, long-term care planning, estate planning and inheritance tax planning, trusts, and protection. Read his profile.
Hugh Breach, Financial Adviser
Last Updated: 21 November 2024
We’d like to think that we’re driven solely by logic and evidence when it comes to financial matters, but this isn’t always the case.
We’re all prone to influences and bias in our everyday lives, not least when investing. In my role as a Financial Adviser, I help clients on a daily basis with their finances and investments and get to see some of these first-hand.
Behavioural finance, the psychology of investing, works on the assumption that people aren’t always rational investors. It argues that we’re often guided by emotional judgements that can run counter to what logic dictates.
Below I highlight 4 common patterns of thinking that might affect your investment decisions and how you can try to overcome them.
This article is not personal advice. If you’re unsure, please seek advice. All investments fall as well as rise in value, so you could get back less than you invest.
A purely rational person should be just as happy with a profit of £100 as they would be unhappy with a loss of £100. But research suggests that the pain of a loss is felt more strongly than the pleasure of a gain.
This can result in a tendency to not want to sell an investment at a loss. Clearly, this is driven by emotion and not entirely by rational decision-making.
This is linked to ‘the sunk cost fallacy’, the action of sticking with a loss because you’re already invested. Think of it a bit like buying a cinema ticket for a really bad film but rather than leaving the cinema, you stick it out because you’ve paid for the ticket.
Tip: One way to overcome the ‘fear’ of selling at a loss (when it’s appropriate, of course) is to ask yourself, if you didn’t already hold that investment, would you buy it today?
In the aftermath of an event, it’s easy to find experts who can provide detailed explanations as to why an event happened. This can cause us to believe that an event was easy to spot and, therefore, avoidable. In reality, this is rarely the case.
Tip: Try not to focus too much on macroeconomic events you can’t control or short-term thinking. It’s far more important to take a step back and think about what’s happening in your world. Think about the long term and give your investments plenty of time to ride out shorter-term market fluctuations.
This concept refers to the tendency for people to ‘follow the crowd’.
The Bitcoin craze is a great example. But perhaps the most famous example of this phenomenon was during the dot-com bubble that occurred around the start of the millennium.
Tip: When investing, it’s important to build a well-balanced and diversified portfolio. Make sure that you’re not putting all your eggs in one basket.
These days, there’s so much information out there, it can be hard to know what to pay attention to.
Sometimes, we’ll actively look for information that simply confirms what we already believe. For example, you might have an idea in mind for your next financial move. When you research it, you ignore the nine articles that say it might not be such a good idea and listen to the one which says you should go for it.
Tip: Most financial decisions are too big to be made on gut feeling. Get some balanced views and don’t ignore the experts.
If you’d like more detailed recommendations on how to reach your specific goals, our financial advisers can help.
Our advisory helpdesk are the gateway to getting financial advice from HL. They don’t give personalised advice themselves, but they’ll help you make sure that advice is right for you and you’re comfortable with the charges involved. If you’re happy to proceed, then they’ll put you in touch with an adviser.
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