Behavioural economics: How not to become your own worst enemy when you invest

Julie Brownlee, Fsp Invest, 28 Feb. 2014

Tags: behavioural economics, investing, investment, invest, investment strategy, strategy, notebook, investment technique, stock broker, stockbroker, emotions, investors, how to beat your emotions when you invest, gut feelings,

Investing comes with a variety of challenges. One of the biggest challenges is the battle you’ll have with your emotions when it comes to making investment decisions. But why are your emotions such a problem? And how can you overcome them to help you become a more successful investor? Read on to find out…

What is behavioural economics?

Despite some academics citing that the market is efficient, the truth is the actions of human beings drive it, John Stepek in Money Week explains. Behavioural economics delves into the decisions that emotional human beings make when they invest. However rational or irrational those are.

A classic example of emotions playing their part is holding onto a losing stock because you can’t accept you’ve made a bad decision.

Your gut is the enemy. It makes you make bad decisions with your investments. So how can you overcome it?

In short, your gut is the enemy. How do you beat it?

One of the best, yet cheapest, investments you’ll make

One way to try and stop your gut from taking over is slowing the investment process down. You need to take time to think about your decision. Rather than the other way around.

And one of the best ways to achieve this is to note down why you’re buying or selling an investment before you get on the phone to your stockbroker.

This technique has two advantages:
  • It makes you think about your investments properly. And it stops you being impulsive.
  • By writing down your reasons for buying and selling, you begin to spot where you’re going wrong.
So get yourself a notebook and pen to keep track of your investments. You need to include:
  • The share price you bought at;
  • The dealing charges; and
  • Why you’re buying or selling.

But for this technique to work, you need to make sure you do this BEFORE you make your trade. This means you’ll have a chance to override your gut instinct.

So there you have it, how not to become your own worst enemy when you invest.

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