The universe of potential investment shortcomings can challenge belief. So we thought we would narrow the range and focus merely on how the ‘seven deadly sins’ can affect what investors want to achieve.
And while we are not positioned to advocate any particular penance, we do suggest investors adopt a spirited awareness of how certain lapses in behaviour could impact their finances.
Taking pride in our achievements is admirable but when this emotion is amplified it can lead to arrogance and self-satisfaction. These feelings can have a detrimental investment impact when we become overconfident and believe we have better abilities than we actually possess. This can come at quite a cost, as we explore here.
While greed in the wider world may constitute an aversion to sharing, when investing it may be realised as a tendency to hoard or hold onto gains. This ‘loss aversion’ can happen even if an investment has little chance of recovery and is one of the common biases that regularly affect our money.
While lusting after investment returns may stretch the boundaries of not only taste, but common sense, we can’t deny the allure of potentially stratospheric investment gains. Yet if something sounds too good to be true it usually is. Consider how many people lose money when the bitcoin price yo-yos, or how fund managers get out of their depth as they take excess risk to chase stellar returns.
Resenting what our neighbours have or the good fortune of others can also have investment implications. For example, when we witness a trend towards a certain opportunity we may not want to feel left out. But following the herd – before the fundamental strengths of an investment are properly assessed – can be highly damaging without thoughtful analysis.
As some may consume too much, investors may also be tempted to seek more and more. This may cause them to chase riskier investments, or frequently, to try and time the market believing they have the talent to achieve this. But as we show here, this pursuit is not a skill, but typically a fallacy – and could lead to serious underperformance over time.
An angry investor is not likely to make rational decisions. And someone who acts rashly, or who furiously chases a missed opportunity is much more likely to invest impulsively – by following the herd or trading too often as we describe above. Or by succumbing to various other cognitive biases such as confirmation bias and availability bias as we also explore here.
Most importantly, we should conquer our slothful tendencies and establish if we are being charged too much by a wealth manager or adviser. A little time and effort now could reap considerable long-term rewards – assess how much better off you could be by exploring our useful fee calculator.
Please remember that when investing your capital is at risk.