Behavioral finance is a research field that examines the psychological factors that influence investment decisions. The researchers in Behavioral finance combine economic and psychological insights to get a good idea of the role of emotions, prejudices and certain ‘stock market wisdoms’ in investment strategies. Forewarned is forearmed, and the results of these studies can help investors deal with these factors.
Investors are not always rational; emotions and prejudices cloud their judgment. The result is suboptimal investment choices. Another important research pillar is Mental accounting. In Mental accounting, the researcher looks at how people categorize and process financial information. This can result in a poorly diversified portfolio and poor investment decisions.
To reduce the impact of emotions, biases and “stock market wisdom” on your investment decisions, consider the following steps:
- Create a plan – this will help you stay focused on your goals and avoid impulsive decisions based on emotions.
- Find objective information – It is crucial to seek objective information and data, such as research and financial news, to make informed investment decisions.
- Diversify – If you read our articles more often, you will probably recognize this comment. We keep saying it: diversify your portfolio. This helps reduce the impact of emotions and prejudices by spreading your investments across a variety of investment products, markets and sectors.
- Don’t get too overconfident – You may have made a lot of profit with a trade. Very good! But don’t get overconfident now. Hubris can lead to irrational investment decisions, so it’s essential to be aware of your limitations. Don’t listen too much to outside opinions and advice. Make sure you do good research.
- Stay disciplined – Don’t be guided by emotions in investment decisions and stick to a well-defined plan.
- Maintain a long-term perspective – This helps the impact of the movements on the stock market. An easy way to stick to a long-term perspective is to invest in your portfolio at a fixed time each month.
By taking these factors into account, you are better informed and make more rational investment decisions.
(Disclaimer)
The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. No rights or obligations can be derived from the information in any way.
The information available in this document is not intended to be a suggestion, recommendation, or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.
The financial instruments discussed may not be suitable for all investors and investors should make their own informed decisions and obtain information on their own about the appropriateness of investing in financial instruments or implementing strategies that may have been discussed in this information.
If you invest in a product, you may lose some or all of the money you invest. The value of your investment can go down as well as up. Any income you get from an investment can go down as well as up.
MeDirect Bank is a trading name of MeDirect Bank (Malta) plc, registered under company number C34125, MeDirect is licensed to conduct banking activities in accordance with the Maltese Banking Act (Cap. 371) and investment services under the Maltese Investment Services Act (Cap. 370).