Successful investors have learned to better understand their investment decision-making process and manage their behavioural biases—tips to fight against yourself and come out a winner.
Every day, we are confronted with news headlines and considerable financial information. If they lack objectivity, they make it difficult to make an informed decision to improve our portfolio. Worse still, investment decisions can be biased by our emotions and faulty reasoning. “To succeed in the stock market, you need to have a certain amount of financial knowledge. However, the hardest part is controlling behavioural bias, which is the tendency for a human being not always to act rationally or logically,” says Carine Monge, financial planner.
Benjamin Graham said that the worst enemy of any investor is none other than himself. Yet the ability to identify and overcome weaknesses in the mind allows for more effective investing. Here are three behavioural biases to know to better counter them:
- Loss aversion
In their Nobel Prize-winning research, psychologists Daniel Kahneman and Amos Tversky found that the pain from a loss is about twice as intense as the pleasure from an equivalent gain. However, Carine Monge points out that the deep desire to avoid losses can have two negative consequences for investors: “They can miss opportunities to grow their portfolio and risk reacting impulsively to a loss by taking actions contrary to their objectives. long-term”. An irrational decision could thus consist of completely exiting the stock market.
Periodic purchases by fixed sums: for automatic investments
- Overconfidence
Do you think you have a gold nugget on the stock market? Warning! An overconfident individual tends to overestimate his ability to be objective in various contexts, especially when it comes time to invest. This blind confidence in his means often leads him to ignore the danger awaiting his assets. “Cautious confidence is preferable in the investment world,” advises Carine Monge.
How to know if you are investing successfully
Do you own shares in the company you work for? If so, is the proportion of these securities relative to your overall portfolio too high? “Make sure that this confidence in your employer’s financial health doesn’t jeopardize your savings plans,” she recommends.
- Mental anchoring
When making an investment decision, the investor tends to refer to the past to the detriment of relevant information. When analyzing particular security, he may be inclined to focus only on a significant number and use it as the only reference value when making his decision.
So, if a title was worth only $7 in March 2017 and is worth $21 today, it is not said that the immediate purchase would not be worth it. The investor who suffers from anchoring risks missing out, making his decision by giving too much importance to one aspect of things, namely that he could have paid only $7 per unit in the past.
The Importance of a Trusted Advisor
To counter this behavioural bias, investors must fight against themselves. “The first step is to know your weak points, to become aware of your erroneous reasoning and to act accordingly,” explains Carine Monge.
A trusted advisor remains the ideal resource to support you, whether by reviewing your investor profile, validating your tolerance for market risk or offering you financial solutions adapted to your situation. Do not hesitate to consult it as soon as the need arises!
