you ever found yourself watching MarketWatch, CNBC or CNN and felt the
need to immediately make an investment decision based on emotional or
personality-driven thoughts or characteristics? You’re not alone.
According to a recent global survey by Barclays Wealth, a large
percentage of wealthy investors not only realize their tendency to make
decisions based on emotions but would welcome help in dealing with the
problem. One of the keys to success is recognizing that a problem
exists and devising mechanisms to control or limit bad decisions. The
report, “Risk and Rules: The Role of Control in Financial Decision
Making,” listed the “Failures of Rationality,” which were found in four
types of investment decisions:
- Failing to see the big picture.
Instead of making decisions while keeping the entire portfolio in
mind, investors will end up investing too much in a single asset class,
industry, or geographic market.
- Using a short-term decision horizon.
When investors focus on short-term returns instead of long-term wealth
accumulation, their willingness to take short-term risks is too low and
they often make the wrong investment decisions.
- Buying high and selling low. Investors
that do what’s comfortable for them during bullish or bearish market
conditions tend to buy when markets are high and sell when markets are
low, which is a risky strategy that fails to take advantage of market
- Trading too frequently.
When investors’ emotional and personality traits take hold, they tend
to take an irrational favoritism towards action, which can lead to an
increase in investment costs and other poor decisions.
else did the Barclays survey find? There is substantial improvement in
investment decisions as people get older. Older investors were much
less likely to trade too often, try to time the market or base
investments on short-term considerations. They were also more satisfied
with their financial situation. The survey also found that women are
better long-term investors than men, who tend to take more risks and are
more likely to favor frequent trading and efforts to time the market.
Because women have a higher desire to use self-control strategies
(which they are also more likely to believe are effective), women tend
to trade less and earn higher returns over time.
The report identified seven self-control strategies to help people counter their tendencies to make bad financial decisions:
- Limit the options. Purchase illiquid investments to avoid the urge to sell investments when the market is falling.
- Avoidance. Avoid information about how the market or portfolio is performing in order to stick to a long-term investment strategy.
- Rules. Establish and use rules to help make better financial decisions, such as spend only out of income and never out of capital.
- Deadlines. Set financial deadlines. For example, aim to save a certain amount of money by the end of the year.
- Cool off. Wait a few days after making a big financial decision before executing it.
- Delegation. Delegate financial decisions to others, such as allowing an investment adviser to manage your portfolio.
- Other people.
Use other people to help reach financial goals. An example would be
meeting with a financial adviser to make and execute a financial plan.
if these popular investment mistakes don’t apply to you, they still
make a good point in the fact that making financial decisions shouldn’t
be based on emotional or personality-driven thoughts or characteristics.
Having a rational investment strategy in place is crucial in making
the right financial decisions. You wouldn’t make a decision about
buying a house or having surgery without thinking it over and going to
the experts for advice, would you? Your investment decisions and
financial management choices not only determine your
future, but the future of others as well.
Take advantage of the
Barclays Wealth’s survey’s self-control strategies and get a solid grip
on your investment decisions.