5 tips to avoid emotional investing
Emotional trading can cost you 2% a year, but it can be avoided with a few tips.
Given the current market backdrop, it's hardly surprising that investors are a bit jumpy in their investing. However, it could be costing you big time.
The survey by Oxford Risk suggests professionals think 1 in 8 are losing 2% a year while investing.
Worse still, 50% are losing at least 1% a year.
The research found nearly three-quarters (72%) of wealth managers agree emotional decision-making is a major cost for investors and 76% say their clients regularly make investment decisions based on their emotions.
"Making investment decisions based on emotions is costing Australian investors every year and the losses on investable capital accumulate the longer people invest," said Bianca Kent, head of client and strategy, Australia and New Zealand at Oxford Risk.
High emotional intelligence and extraverts more prone to poorer results
While these might help you in your day-to-day life, it turns out emotional intelligence and being extraverted are more prone to making emotional investment decisions.
RMIT's senior lecturer Dr Angel Zhong explained to Finder that personality types can play a big part in emotional biases.
"For instance, people who love sensation-seeking are more likely to engage in risky investment behaviour and to experience greater emotional arousal while making investment decisions," she said.
Going further, the associate professor pointed out that emotional intelligence might not be useful in investing.
"Investors with higher emotional intelligence (the ability to perceive, understand and regulate emotions) tend to make investment decisions based on their emotions rather than a rational analysis of market data."
She added, "Investors who are extraverted are also more likely to make investment decisions based on subjective beliefs rather than objective information."
5 tips that can help you avoid these biases
Luckily though, there are a few things you can do regardless of your personality type.
Dr Zhong gave investors her 5 tips for avoiding emotional biases when investing:
- Enhance your financial literacy. If you don't even know that your emotions can control your investment decisions, you won't be able to manage this process.
- Establish a long-term investment plan. By setting clear goals and developing a strategy that aligns with your long-term plans, you'll have something to aim for which can help with short-term impulses.
- Diversifying the portfolio is crucial. Spreading investments across different asset classes and sectors can help reduce risk and avoid the over-concentration of your investments in a single stock or sector.
- Stick to your long-term plan. By maintaining a consistent investment strategy and avoiding the temptation to frequently buy and sell based on short-term market trends, you can help reduce the impact of emotional decision-making on your portfolio.
- Keep up-to-date on market news and trends. This can help you make more informed decisions and avoid making impulsive investment choices based on incomplete or inaccurate information.
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