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Behavioural Finance is a big term that may sound intimidating. But it is actually just a term for all the behaviours we (humans) make that can lead to poor investment decisions. Learning more about them can help us avoid making mistakes with our money. Here are five key investing behaviours you should avoid:
- Loss Aversion
The pain of loss is twice that of the joy of earning a return. As a result, people may hang on to an investment when indicators suggest they shouldn’t—because they are afraid of realizing a loss.
Anchoring is when you fixate on a specific price point, and won’t sell unless a stock reaches it again. For example, when a stock reaches a new high in price after a growth phase, and then retracts, but you are unwilling to sell until it reaches the high again (even though it is unlikely to ever rebound).
This is exactly what it sounds like: following what everyone else is doing—which is not always the best move for you.
Many investors tend to overrate their ability to time markets and pick winners. This is a risky strategy, given the unpredictability of markets.
- Status quo bias
This is the belief that the market will continue to go down (or up), simply because that is the way it has been trending recently.
So how do you avoid behaving badly with your finances? We recommend that you:
- Find a qualified and experienced advisor you trust.
- Work with your advisor to create a long term financial plan that is right for you.
- Stick to the plan.
If you would like to meet with an investment planning advisor from CDSPI Advisory Services Inc. and develop a long-term financial plan, contact us at 1.800.561.9401 or firstname.lastname@example.org.