To be a successful long-term investor, it is critical to understand, and try to overcome, common human cognitive or psychological biases. Eloise Hammond, Chartered Financial Planner at SeventySeven Wealth Management, outlines some common mistakes.
It’s pretty common for people to make investment decisions based on what they see as a successful trend – why wouldn’t you invest in something when you see its value going up and up? But over-confidence can result in a false sense that nothing is likely to go wrong, which increases the risk of you being blind-sided when something does go wrong.
Every asset class performs in cycles. What’s working today might not be in a few days, weeks, months or even years so you need to look at investments strategically, over a long-term period and free from emotions, which can have a negative effect on our decision-making process. More on this later.
Believing that you can time the market is another common mistake when it comes to investing but no one can consistently time the market and trying to do so can significantly damage your investments’ strength.
It is imperative, particularly in times like these, to take a long-term view of investments and instead of focusing on ‘timing’ the markets, focus on ‘time in’ the markets. It might seem a little absurd to invest when things seem so uncertain but in fact this is a good time to invest.
Asset management is a business built on the notion that the future is somewhat knowable, even if, in large part, it is not. My clients tend to fall into the two types of forecasting camps identified by economist John Kenneth Gailbraith: “those who don’t know and those who don’t know they don’t know.”
Short-term volatility shouldn't matter to long-term investors – it's just an inevitable part of investing – and, over time, you will realise that it is very difficult to time the market consistently and successfully over the long run.
To go with your head or your heart? It’s a question we may well ask ourselves when making decisions on a daily basis. But, investing (or not investing) based on how you might feel on any given day is risky business.
It’s easy to want to invest more when markets are strong and to want to pull investments when they are not but this is counterintuitive. Withdrawing funds when markets are low only crystallises the loss.
Even the most prudent investors will respond emotionally to market fluctuations but try to remember that while your money is still invested, it’s only a paper figure, so my advice is to not let your heart take over. When people invest (or disinvest) based on events, such as elections, divorces, deaths, recessions or other emotionally-charged activities, it normally turns out to cost them a lot of money.
The best an investor can do is to know themselves and be ready to manage their emotions when markets rise and fall. Having a third party, like a financial planner, who is not tied up in your own emotions and can look at things objectively can help. Even if it’s just to hold your hand through the decision-making process.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
If you would like help making investment decisions for a brighter, long-term financial future, please contact Eloise Hammond on:
01892 770 077
Eloise Hammond | APFS
Chartered Financial Planner