Top 5 Investing Biases that may Adversely Affect Your Portfolio
Tags: Financial Planning, Investment, Portfolio, Investing, Finance

As an investor, you spend a considerable amount of your time in evaluating and developing an investment plan. You decide how, when, and where to invest. To understand how it will impact your portfolio, you constantly study the market as well.

But, do we always take decisions objectively rather than emotionally? Also, do our emotions play a role in our success or failure?

The answer to this question is… YES, they do! A good investor understands that not only facts and figures but his emotions, behaviour etc. may also affect his decisions and returns. Such behavioural biases are very common and usually govern many decisions that an investor takes. Following are the five most common biases to pay attention to:

1. Confirmation Bias

When we unconsciously look for information to support a decision that we have already taken, we are influenced by the confirmation bias. In this case, we unintentionally ignore the flipside of the coin.

We may believe that we are making decisions by basing them on expert opinions and information but we don’t realize that we are just advocating the viewpoint that we already agree with.

2. Overconfidence Bias

Our tendency to overestimate our ability to take the right decision or to get overconfident about the data we have is the premise of overconfidence bias. Thinking that if you got it right the first time, then you will always get it right is a mistake that an investor can’t afford.

Taking an excessive risk or investing more money when one should be cutting down his losses are examples of this bias. To overcome this, one should lay down a well structured financial plan, by taking care of all related investment risks.

3. Loss Aversion Bias

An investor has been under the influence of loss aversion bias when he focuses on averting the loss rather than making profits. This means that the investor is trying to play safe all the time. This might lead to stagnation and hinder the increase in returns. To yield good returns, high-risk investments are required. But these risks can be mitigated by narrating a good research financial plan. Playing safe won’t help in earning good returns.

4. Recency Bias

An investor who suffers from recency bias tends to focus on the recent set of data and not on the overall trend. For example, an investor might want to increase risk-taking after getting good returns.

5. Anchoring Bias

The tendency of attaching our decisions on a particular piece of information is called anchoring bias. For example, an investor may sell an overvalued option because he thinks the purchase price is the fair value but does not consider the underlying principles.

How can you save yourself from such biases?

While it is impossible to eliminate such biases totally, recognizing and minimizing these by relying on current market conditions, objectively assessing real-time facts and figures, and taking the historical trends in consideration will help reduce the effect of most of these biases and will surely help you in getting better returns. To be the player of your field, it’s always good to play in a team. Team up today with Fincart and be the Financial Investment champion!