This is the overconfidence fact. Everyone thinks they are better drivers than they are when this can’t be possible. We have the same fallacy when it comes to investing. We overestimate our skills and ability compared to others. So, people take punts on stocks because they think they know better, or try to time the market because they believe that they know what is going to happen.
Sorry, but you are probably not smarter than everyone else.
The majority will invest when the markets have been doing well and then sell when they have done badly. Essentially you buy high and sell low, which is not a successful strategy. Investments will experience falls in value and if you panic or stop investing when this happens, this will impact on the returns you get.
Whether it is reacting to the news or focusing on how investments are doing now, you need to realise that investing is a long-term approach. Real wealth is brought by investing consistently over the long term and benefitting from compounding returns.
Whether this is constantly moving your investments to the latest hot fund or following the latest fad. Remember if it sounds too good to be true, it probably is. Successful investing is about the long game.
Without a plan of what you are investing for, you will likely react to market events or alter your strategy when you don’t need to. Or constantly focus on finding the best performing fund. The only return that matters is the one you need to achieve your goal.
An investment strategy should only change if your plan has changed.
Inflation will erode the purchasing power of your money over many years. If you are investing by holding money in cash you are actually losing money. You need to focus on the return your investments are getting after inflation.
People think investing has to be complicated. They switch their funds around, try to predict what will happen or what you should invest in. A simple strategy such as investing in a low cost globally diversified portfolio will be enough for most people to be successful.
We like to think we are but there is a whole load of emotions that come into play. Whether it is the fear of loss, fear of missing out, fear of making a mistake - we can’t always be objective and this can lead to investment mistakes.
Whether it is hindsight bias (it was obvious Netflix would be a success), confirmation bias or loss aversion, there are several biases that people have that affect how they deal with their money. These biases can affect your decision-making and can lead to poor investment decisions. None of us are immune from our biases, even financial advisers.
The mistake we make is that they believe that investing is about finance whereas it is really about how people behave with their money. We are designed to be bad at investing because we are human. It’s not our fault. We are not robots when it comes to making investment decisions and our minds, experiences and emotions all come into play and impact our ability to be good investors.
We can’t see our own blind spots when it comes to our money and that is why it is often beneficial to have an objective voice who can challenge our thinking. If you feel like you would benefit from chatting with someone about investments, please get in touch by emailing us at support@worktolivefp.com.
A reminder that this article doesn’t constitute financial advice and is intended as information only. Should you need financial advice you should speak to a trusted financial adviser. There are limits to how much you can put into the pension and it can be complex, especially for those affected by tapering of the annual allowance.
You should do your own research before acting on any information within this blog. Remember the value of your investments and pensions can go up as well as down, and there is no guarantee you will get more than you put in. Past performance is also not a guide for future performance.
