Investing is more than numbers and market trends; it’s a psychological game. Our brains are wired to trick us into making poor investment decisions. Knowing these biases is key to long-term financial success.

5 Behavioural Biases to Be Aware Of:

1. Confirmation Bias: We look for information that supports our existing views and ignore the opposite. We hold onto losing investments for too long or miss out on better opportunities. Example: Ignoring bad news about a stock you have a big position in.
2. Overconfidence Bias: Overestimating your ability to predict the market or pick winning stocks means more trading, higher costs and lower returns. Overconfidence also means expecting high gains without considering the risk.
3. Loss Aversion: The pain of a loss is greater than the pleasure of an equivalent gain. Investors hold onto losing investments, hoping they’ll come back rather than cutting their losses and reinvesting elsewhere. Share price falls can intensify loss aversion, making it even harder to sell declining stocks.
4. Anchoring Bias: We focus on one piece of information, like the price we paid for a stock and use it as a reference point for future decisions. This stops us from adapting to changing market conditions or new information.
5. Herding Behaviour: Following the crowd means making irrational investment decisions. When everyone is buying or selling an asset, it creates artificial bubbles or crashes driven by emotion, not fundamentals.

Being Prepared for Volatility

Volatility means big and sometimes wild movements in financial markets, including the stock market. Understanding volatility is key to making informed investment decisions. Market downturns are scary, but they are part of the cycle. Disruptions to the financial markets are normal, and being prepared for them is crucial.

Investing involves risk, and volatility is one of them. But it’s also an opportunity to buy low and sell high. To navigate volatility well, you need a clear investment strategy and a defined risk tolerance. If you’re not sure how to manage volatility, seek professional advice.

The Australian Securities Exchange (ASX) is a volatile market. It has over 2,000 listed companies and is influenced by many factors, including economic conditions, political events and company performance.

To manage volatility, you need to diversify your portfolio. A diversified portfolio reduces risk and increases potential returns. You need to have a long-term perspective and not make impulsive decisions based on short-term market movements.

Setting Investment Goals

Having clear investment goals is key to success in the stock market. Defining your financial objectives, risk tolerance, and investment style is essential for making informed investment decisions. Your investment goals should be Specific, Measurable, Achievable, Relevant and Time-bound (SMART).

Your investment goals will change at different life stages and ambitions. For example, if you’re a young investor, you might focus on growth and long-term wealth accumulation. If you’re nearing retirement you might focus on income and capital preservation.

You also need to consider your risk tolerance when setting investment goals. Risk tolerance is your ability to withstand market movements and potential losses. If you’re risk averse you might prefer more conservative investments like bonds or a savings account. If you’re willing to take more risk you might consider growth investments like shares or property.

How to Overcome Behavioural Biases: Seek Professional Advice

• Awareness: Recognise these biases exist and can affect your decisions.
• Plan and Stick to It: Create an investment plan based on your goals and risk tolerance and review it regularly. This will help you avoid impulsive decisions driven by emotion. View your investment strategy as part of your investment journey, and it will encourage you to stay committed and make informed decisions.
• Diverse Opinions: Don’t rely on one source of information. Get advice from a financial advisor, read different financial publications and discuss your investment ideas with friends or family.
• Regular Portfolio Reviews: Review your portfolio regularly to make sure it’s aligned with your goals. A financial advisor can help you with this and make adjustments based on market conditions and your life changes.

Diversified Portfolio an Investment Key

A diversified portfolio is key to managing risk and increasing potential returns. A diversified portfolio should have a mix of asset classes, including shares, bonds, property and cash. And diversify within each asset class to reduce risk further.

For example, if you’re investing in shares, consider diversifying across different sectors like technology, healthcare and finance. You might also invest in domestic and international shares to spread the risk.

A diversified portfolio can help you achieve your investment goals and manage risk. Review and rebalance your portfolio regularly to make sure it’s aligned to your goals and risk tolerance.

Investing in a diversified portfolio can also help you navigate volatility. By spreading your investments across different asset classes and sectors, you can reduce your exposure to market movements. But remember, diversification is not a guarantee against losses, and you need to have a clear investment strategy and risk tolerance.

In summary market volatility, clear investment goals and a diversified portfolio are the keys to success in the stock market. Seek professional advice, consider your risk tolerance and review and rebalance your portfolio regularly to make sure it’s aligned to your investment goals.

Value of a Financial Advisor: Aligning with Your Financial Goals

Investing can be complex, and managing psychological biases can be tough. A financial advisor brings expertise, objectivity and discipline to investing. They can help you:

• Acknowledge and manage your biases.
• Diversify your portfolio.
• Make decisions, not emotions.
• Stay on course to your long-term goals.

Don’t let your biases ruin your financial future. Get in touch today to find out how a financial advisor can help you make better investment decisions and achieve your goals.