I’m going to teach you how to avoid three of the biggest mistakes investors make. They may be behavioral mistakes, but they can have big impacts on your financial health or wealth.
Humans are complicated, irrational beings and we’ve all heard that our mindset and behaviors can have a massive impact on our financial outcomes.
Our brains are hardwired with psychological biases that can hurt us as investors, especially when we’re experiencing an economic crisis and volatile markets.
Here are 3 of the biggest mistakes investors make and what you can do about them, should you realize you are making them.
1. Action Bias.
Humans are naturally primed for action. It is part of that primal part of us that needs to be ready to flee should danger arise. Being primed for action makes us feel in control, especially in uncertain times. Sometimes immediate action is the wrong move, especially when it’s driven by emotional reactions or gut instincts.
Dissolve your action bias by taking time to engage the rational part of your brain. Sometimes that’s easier said than done when you are emotional and feeling unsettled. But spend some time outdoors in nature. Do something that calms you. Take a moment to appreciate something that is enjoyable. Stop and pause.
Then when you are calmer and more rational talk over your thinking with someone else, preferably a qualified professional. Walk them through your plan of action and let them explain the implications, if any, of following through on your action plan. Before making any rash decision, be sure to understand the full implication of what you are doing.
You may realize that what you thought was the best action, isn’t.
2. Recency Effect.
We tend to remember recent events more clearly, so we give them more weight than past and potential future events when making decisions. Do you notice yourself doing this? You made an investment decision that had a not so great outcome and so you base all of your forward decisions on that last action outcome.
While market losses hurt, we can’t let them derail our goals or keep us on the sidelines. Talk to someone about how you are feeling. Someone that understands what its like to be in a similar situation.
A Financial Advisor is going to understand and help put everything back into perspective. Not taking action to solidify your financial wealth during any market situation is something you may regret long term. When you notice yourself making decisions on past outcomes know that it is possible to shift your thinking.
Don’t let the impact of recent events stop you from taking the best action to support your long term financial goals.
3. Confirmation Bias.
This happens to be Warren Buffets favorite bias.
We love being right and hate being wrong. So much so that our brain tricks us by being more receptive to information that confirms what we already believe and resistant to conflicting evidence.
This confirmation bias can lead us into situations where we are investing in the least best way. And that ultimately leads to less financial freedom than we otherwise may have wanted.
Counteract this by getting an outside perspective and creating systems to make logical decisions.
Buffett has Charlie Munger to talk ideas with. Sure he’s a big time businessman and investor who has likely experienced a lot. You don’t need someone like that to support you, I’m here to help.
The truth is, we all have biases, even as professionals. By learning about how our brains work, we can leverage our behavior and create systems that help us remove bias and create better financial outcomes. That’s why understanding the behavioral side of money and investing is so important.
A Financial Advisor can be a good sounding board for anyone noticing these types of biases.