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Inside the psyche of an investor
Most of us recognise personal traits, the things that set us apart and determine how we think and act, even communicate in some cases. What we don’t always recognise, however, is the effect those characteristics can have on our behaviour, particularly when it comes to things like spending, saving and investing.
If you’re someone who takes risks, plays to win, or you tend to compare yourself to others as a way of measuring success, those drivers can also influence the way you invest.
We’re not saying you need to be a psychologist to invest well, but there are enormous benefits to understanding why you invest the way you do. Moreover, if you can manage impulse behaviour, you’ll be able to use both to avoid common mistakes and the emotional biases that can trip you up, which could send you down an investment path that’s less about reason and rationale than chasing the big win – whatever the cost.
Women are from Venus. Men are from Mars.
As a result of decade’s worth of psychological and scientific studies, we know there are many distinguishing factors between male and female brains, and that can lead to big differences in the way we process information and act on it.
There’s strong evidence to suggest those differences come to the fore in the way men and women manage their personal finances. For example, psychologists suggest men are more likely to associate money with power, respect and control. They’re confident about their financial knowledge, more predisposed to taking the risk and they’re happy to attribute investment gains to personal know-how, over advice or market movement.
There are always outliers in every study of course, but the overall trends are hard to ignore and if we can learn something from them, it makes sense to use them so you can box clever and negotiate the psychological factors at play in investment decision making.Source: Psychology Today, Men, Woman, and Money, Jun 2016.
Top tips to avoid the most common traps
Thrill-seeking: Investing is a long-term financial plan, so investors with over-zealous appetites for risk, or those less likely to follow a strategy or plan may struggle to stay invested for the long haul.
Be clear about your goals and base your investment decisions around meeting them. If you think about investing as a journey that should take you from point A to point B as safely as possible, there’s no need to break the speed limit or put yourself at risk.
This is about being limited to one perspective or an over-reliance on a preconceived belief. For example, believing a company is successful, simply because you’ve always liked them or remember a time when they were successful, as opposed to any sound evidence on their recent performance.
Be flexible in your thinking, stay open to new sources of information and base decisions on fact over opinion or past situations.
Accepting loss and changing direction doesn’t come easy to everyone but holding out or investing more in a sunk cost because you have an emotional investment, can prove disastrous.
Think head over heart and resist the urge to dig in if your investment is sinking fast. An emotional reaction or clinging to the idea that you must stand by previous choices can make things worse.
Remember, if you think you can ‘win it all back’ with a bold move, the flip side is that it could also go the other way.
Seeking solace and affirmation from investors in a similar position can attract bad advice or encourage self-delusion.
Talking to someone in the same situation as you can sometimes bring an element of comfort, but it’s not always wise to take investment advice from someone trying to deal with the same issue.
If you need advice, get it from a professional so it’s objective, fact-based and 100% reliable.
Delaying the inevitable, burying your head in the sand or keeping schtum…won’t change reality.
Don’t put off until tomorrow, what you can do today! Procrastination won’t pay in this situation. Get the advice you need and act on it.
Affordability, risk and reward are all relative. The trap of buying into other people’s personal circumstances is an easy one to fall into if you get too caught up in what other people are saying or doing.
Invest for you and your goals only. Your psychological make up and personal situation will always be unique, so your investment decisions should be too.
Overconfidence can prove an expensive lesson.
Remember the past is no prediction of the future and confidence should always be balanced with the fact that there can never be 100% market certainty.
Believing you always know better is a short-sighted and dangerous investment strategy. Ivory tower investing rarely ends well.
Market researchers, data analysts, independent advisors, market experts - they all exist for good reason and you won’t always know more than they do.
Good advice from competent, impartial people is always recommended.
A 14-stage map was developed following years of research to help understand the emotional journey investors make with financial decisions that include an element of risk.
It’s a rollercoaster that can take someone from optimism to fear, panic, hope and relief.
It’s not recommended that you make any major decisions in an emotional state – good or bad.
Independent advice can help take emotion out of the equation and allow you to keep more control.Source: Investopedia, 8 Psychological Traps Investors Should Avoid, Mar 2018
Everyone’s investment priorities are different and the journey from A to B is always a personal one, but with some understanding of the role your personality and behaviour play, it doesn’t have to be an emotional one.