With the thousands of stocks, mutual funds and other investment vehicles to choose from, plus the countless bits of information that are added every day, it’s normal for investors to be frustrated. When this happens, some may turn to trends that could undermine their investment decisions.
Psychologist Daniel Kahneman has studied decision-making for over 30 years. In the late 1970s, he and his colleague Amos Tversky turned their attention to the field of investment decisions, also known as behavioral finance. Their findings show that when investors are faced with a sea of information, their acquired biases can lead them to avoid decision making, which can lead to poor investment choices.
Common investment mistakes based on trends
Below are five trends often cited by proponents of behavioral finance – and possible ways to avoid them.
1. Being too Emotional
Investors sometimes listen to what they want to hear, ignoring the indications that a company is faltering and hang on to the indications that its future is bright. To avoid this, try not to fall in love with a particular stock. Disciplined investors will sell their shares as soon as their original reason for buying is no longer valid, such as when a firm’s revenues are deteriorating or its management is changing.
2.People tend to be confident
After a period of rising stocks, some investors may make the mistake of viewing the strength of a speculative stock market as their own talent. They tend to take more risks and thus remain vulnerable to changes in the investment climate.
To overcome being overconfident, review your portfolio’s asset allocation. Keeping your assets close to your original strategy and rebalancing as needed can prevent your portfolio from getting stuck in an asset class that has only recently started to rise.
For example, making a lot of money 2 times with high-yielding investment strategies such as binary options trading, does not mean that you will earn again on the 3rd with 100% probability. Do not be confident that much, continue to research both investment strategies and follow the current news in the stock market. Visit binaryoptions.com for the most up-to-date guide on binary options.
3. Don’t believe that quantitative data is more important than qualitative research
This notion has grown in the past years as a result of the steady rise of computer-driven investment models and the ever-increasing effort to explain and predict investment performances with only statistical and mathematical genius. Unfortunately, blind faith in numbers may not lead you to invest in the right strategies.
4. Distinguish between speculations and facts
According to money manager David Dreman, “unknown” stocks often tend to exceed these more well-known stocks in value. Why? This is because people often overestimate the value of familiar investments, which can drive the value of more well-known stocks to unrealistic heights.
Get to know yourself as an investor
Behavioral finance claims that investment results depend on knowing yourself as well as knowing about companies, stocks and funds. Does this mean you can beat the market if you know your psychology well? Not really. But if you are aware of some common investment trends, you can at least shrink your potential losses.