Psychological research has shown that we make most of our decisions subconsciously. Some of them may be good, others less so, including when it comes to investing. Take ‘buy when things are going well’ and ‘sell when things are going badly’, for example. It’s possible that you too listen to your subconscious mind and your surroundings more than you think... Learn more about the major pitfalls.
We tend to read the newspapers and websites that report the news as we see it, and we mainly like people who agree with us better than people who don’t. Why is this? It’s because we all suffer from confirmation bias. This means that we favour (and go in search of) information that fits in with the way we think. And that we ignore information that doesn’t fit in with our thinking. If you’re a keen investor in biotechnology, you’ll subconsciously look for information that tells you that this is the right choice and you won’t be receptive to information that tells you otherwise.
As social beings, we tend to copy each other’s behaviour. This includes the way we invest. You might remember the internet bubble at the turn of the century. Rising share prices persuaded investors to invest increasingly large sums in IT companies. But lots of these companies hadn’t been making profits for years and couldn’t meet the expectations. Share prices plummeted. The internet bubble burst and investors paid the price.
Loss is often at the front of our minds. That makes sense really, as it hurts. Research has shown that the pain of losing is a stronger feeling than the pleasure of winning. We’re more deeply affected by losing €100 than we are by winning €100. Some investors find it difficult to deal with losing. They become obsessed with current losses and lose sight of the long term or the portfolio as a whole. As a result, they postpone losing and only sell when share prices are at rock bottom.
A lot of investors consult stock market gurus in their search for high returns. If a successful stock market millionaire says it, it must be true. You can see how successful they’ve been!
But ask yourself this:
Investing and professional football have one thing in common: we all know more about them than anyone else. Investors often think that they have a better understanding of what’s going on than other investors or even the experts. Overconfident investors overestimate themselves and think that they are in total control of their investments. If things are going well and you’re generating good returns, you might subconsciously think that this down to you and the decisions you’ve made rather than the favourable conditions on the stock market, for example. You might even consider taking more risk to achieve even higher returns. Overestimating your own role can lead to decisions you might later regret.
We can learn from our mistakes. But we don’t like thinking about things that went wrong. Our brain prefers us to remember our successes. But if we don’t have a realistic picture of the past, how can we assess new opportunities and risks?
Dutch private investors invest a lot in AEX shares. And Germans invest in ‘their’ Dax shares. These national companies are household names, and this inspires confidence. But it also restricts the spread of risk in your portfolio. Too much in one investment category (shares) and too much in one country. Staying close to home isn’t always the best policy.
Recognising them as pitfalls is a good first step. It might also help if you realise that a lot of subconscious decisions are made hastily. Writing an investment plan will protect you from making decisions too quickly. Making agreements with yourself in advance will prevent you from being too easily swayed. An investment plan keeps you focused on your long-term investment goals. That’s the most important thing.
Investing involves risks. You could lose (some of) the money you invested. If you are going to invest, it is important that you are aware of this. Invest with money you can spare. Read more about the risks associated with investments.
If you want to build up your knowledge before you start investing, or just want to understand it better, learn the basics in just 8 steps.
All investors have emotions, even the most rational ones. Investment decisions are largely driven by these emotions. And they can be different during every phase of the stock market process. Ever wondered how you’d react? We’ll take you for a ride on the emotional roller coaster that can affect any investor.
Superman or Batman? The Beatles or The Rolling Stones? People can have never-ending discussions about which is the best. In the investment world, this ongoing discussion is about the superiority of technical analysis versus fundamental analysis. Find out more about both and decide for yourself.
