You are here: Home - Blog -

BLOG: How human nature can make DIY investing a no-win situation

0
Written by: Lee Goggin, co-founder, Findawealthmanager.com
26/06/2015
While those who invest may like to believe otherwise, they are ultimately at the mercy of their emotions. Generally, while people are adept at analysing data, they are less good at withstanding the influences of psychology.

As a result, the biggest investment errors come from psychological rather than informational or analytical factors. The psychology of investment contains many separate elements, which usually lead to poor investment decisions.

  • Greed

Greed is a powerful characteristic, which can cause individuals to ignore caution, logic, risk aversion, prudence, and memory of painful past experiences and a host of other sensible behaviours.

While such recollections could theoretically keep investors out of trouble, greed can lead people to pursue investment strategies that they hope will provide high returns, without high risk.

People will pay inflated prices for investments that are in fashion hoping that further appreciation is left, only to see their investments decline in value.

  • Illogic

Logical decision-making should form the cornerstone of an investor’s thought process. The purpose of investing is to make serious decisions and returns, while watching for things that might trip us up. Inadequate scepticism helps us make poor decisions and ultimately lose capital.

The classic post-mortem of financial catastrophes often includes the phrases “too good to be true” and “what were they thinking?”. What exactly makes investors fall for these delusions is usually a failure to learn from the lessons of the past.

When similar circumstances occur again after a few years they are trumpeted by a fresher generation of investors extolling the wonders of this new infallible investment. Hope springs eternal, usually over logic.

  • Herd Mentality

Human beings exhibit a common tendency to feel safe in groups. Nowhere is this more evident than in investment behaviour. The pressure on individuals to conform and the desire to get rich can allow the unwary to drop their guard and join the latest fad or investment bandwagon.

Those that do not initially share the consensus view can feel left out, reach the point where they feel they are the odd one out, and then join the rest. Think back to the tech bubble – some investors made a fortune and many more lost almost everything.

  • Envy

Generally in life and very often when it comes to investing, people become disillusioned and unhappy at the thought that others might be doing better and making more money than they are.

If you managed to make 6 per cent, which is no bad thing, and your friend made 12 per cent, don’t let yourself be influenced by the destructive power of envy. You might do better than your friend next year.

  • Ego

Achieving solid returns in good years and suffering smaller losses in bad ones is no bad investment philosophy. Those investing without ego will invest without exhibiting risky behaviour and be cognisant of how much they don’t know, while keeping their egos in check.

It isn’t a glamorous path to follow, but it demonstrates a prudent and logical approach; after all, investing shouldn’t really be about glamour.

Human beings are sensible and logical beings with the ability to make sound decisions in many situations – unfortunately, when it comes to investments, things can take a nasty turn. They hold on to convictions for as long as they can, but when the psychological and economic pressures become too great, they jump on the bandwagon – which often takes them in precisely the wrong direction.

To be a successful DIY investor one has to be disciplined. If you’ve tried and failed, you’re not alone. In fact, one could say you’re only human.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Autumn Statement: Everything you need to know at a glance

Yesterday Chancellor Jeremy Hunt made his first fiscal statement in the role, outlining a range of tax measure...

End of Help to Buy: 10 alternatives for first-time buyers

The deadline for Help to Buy Equity Loan applications passed on 31 October. If you’re a first-time buyer who...

Moving to an energy prepayment meter: Everything you need to know

As households struggle with the soaring cost of energy, tens of thousands of billpayers are expected to move o...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week