Cars are sold on emotion. TV adverts focus on the vehicle swooping along an open road, with swelling music and a sense of freedom. Some people say: “Never mind the car, I want to buy the road!”
When choosing a car, you might identify colour, performance or price as your primary criteria, but how you FEEL about driving it may well affect your choice.
So what is your decision-making process regarding investments?
- When the market is low, some private investors feel frightened and ‘bottle out’, while others are determined to hold into losers in the hope they will recover.
- When the market is high, some people feel overconfident and refuse to sell, while others rush to cash in their winners.
It’s commonly said that greed and fear drive stock markets. However, according to Behavioural Finance theory, emotions are often the reason for under-performance.
Here are some tips…
DOs and DON’Ts
DON’T be overconfident about any one investment.
DON’T imagine that you can influence or control the market.
DON’T trade too often.
DON’T imagine you have magical skills or luck.
DON’T panic during a losing streak.
DON’T procrastinate about making financial decisions.
DON’T be swayed by current market conditions.
DON’T be biased towards UK markets and high-profile brand names.
DON’T assume that past performance indicates future performance.
DO treat all your investments as a single portfolio.
DO invest regularly and have scheduled reviews.
We don’t fall into the trap of behavioural bias, because our scientific approach to investing takes the emotion out of it.
Part 2 of this article will follow in the near future.
P.S. Please note that there is no guarantee to investment success. If there were, we would be retired and sunning ourselves on the beach right now (with a flash car in the car park).