Why emotional decision-making could be costing you investment returns
August 2023
It can be difficult not to let your emotions influence the decisions you make. When investing, emotional decision-making could be harming your portfolio’s performance and your ability to reach your goals.
While you try to make investment decisions based on logic and facts, it can be easy for emotions, from fear to excitement, to play a role at times. And a survey of financial advisers reveals it could be costing you more than you think.
According to a report in FTAdviser, financial advisers believe emotional decision-making costs investors at least 2% each year in foregone returns. They believe two of the biggest mistakes investors make are:
- Being too influenced by the news (47%)
- Taking too little risk (44%).
If you’ve been guilty of these mistakes in the past, you’re certainly not alone. The good news is that there are things you can do to reduce the effect emotions have on your investments. Read on to find out how you could tackle these two mistakes.
1. Tuning out the news to focus on your long-term plan
Market volatility is part of investing. Unfortunately, sensational headlines about markets “soaring” or “plunging” sell. However, they often don’t show the bigger picture – that even after volatility, markets have, historically, smoothed out over the long term and delivered returns.
On top of providing a snapshot, rather than an in-depth look at markets, remember that the news isn’t tailored to you. An investment opportunity that is perfect for one person, may not be right for another.
If you read about markets falling sharply or the latest “must invest” tip in the newspaper, it’s natural to think about what it means for your investment portfolio. Perhaps you’re scared that volatility could mean the value of your assets will fall and you won’t be able to retire when you intend? Or maybe you feel a thrill at the thought of investing in the next big technology firm?
Tuning out the noise can be difficult, but it may reduce the chance of emotions affecting your decisions.
Working with a financial planner may help you reduce the effect the news has on your mindset. It means you have someone to turn to if you have concerns or would like to pursue an opportunity. Speaking to a professional about your options could prevent knee-jerk decisions you might regret later.
Creating an investment strategy that’s tailored to your goals and circumstances with a financial planner may also give you the confidence to dismiss the news.
At times, your portfolio may dip but understanding why investments have been selected and how it fits into your overall plan could put your mind at ease.
2. Balancing how much investment risk you should take
It’s common to hear that investors are worried about taking too much risk. After all, too much risk could mean you’re more likely to lose your money, and it could affect your progress towards your life goals. Yet, nervous investors can take too little risk.
While you may feel comfortable taking less risk as your money is “safer”, you could miss out on potential growth. Taking too little risk for your circumstances may mean falling short of your goals, even though you had an opportunity to achieve them.
Setting out a risk profile is an essential part of understanding which investments are right for you.
It can be difficult to understand how much risk is appropriate. A financial planner could help you here. By considering a range of areas, from what assets you hold to your investment goals, we can create a risk profile that suits you.
By understanding risk and what’s appropriate for your circumstances, you could reduce the effect emotions like fear have on your decisions. You may feel confident enough to take greater investment risk if it’s right for you and find yourself in a better position to reach your goals.
Want to review your investments? Contact us
Tailored investment advice may help you reduce the effect emotions have on your decisions so you can focus on what’s right for your circumstances.
Whether you want to start investing or would like a portfolio review, please contact us. We can work with you to create an investment strategy that you have confidence in and provide ongoing support so you have someone to turn to if you have any questions or concerns.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment 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.