FIVE COMMON INVESTING BIASES THAT CAN HURT YOUR PORTFOLIO
1. HERD MENTALITY
Many investors follow what others are doing instead of using their own discretion and analysis. This is often driven by peer pressure and the quest to earn more.In the process, they end up taking more risks than warranted.
2. LOSS AVERSION BIAS
Loss aversion bias is the tendency to avoid losses over maximising gains. Loss-aversion bias can lead to poor investment decisions and is one of the reasons investors tag on to bank fixed deposits over that of equities.
3. RECENCY BIAS
Investors often latch on to a fund that has topped short-term return charts, while ignoring consistency of performance over the long-term.
4. CONFIRMATION BIAS
Some investors have a belief about the market condition and often gravitate towards information sources that confirm it.This is often the case when stakes are higher and investors buy too much in a stock or fund without diversifying their portfolio.
5. MENTAL ACCOUNTING
Mental accounting refers to different values people place on money based on their subjective criteria.
WHAT TO DO INSTEAD?
INVESTING WITH A GOAL
Once you attach a goal to a particular investment, you mentally start allocating money for it. So set a goal and start working towards its corpus by saving and by rationalizing your spending.
Trying to time the market is fraught with risk. By automating the process you don’t fall prey to the herd mentality.
INVEST FOR THE LONG HAUL
Staying invested for the long-term ensures you beat market volatility and let the power of compounding work its wonders. As a thumb rule, seek diverse market opinion so that you don’t fall prey to confirmation bias.
By leaving the fund management to professional fund managers, you can free yourself from the perils of loss-aversion. Accordingly, choose an asset mix based on your understanding of risk and objectives and build a portfolio.