Six bad habits of the average investor – and how to overcome them
The field of behavioural finance aims to understand how and why emotions affect investment decisions. Barclays Behavioural Finance team has identified six bad habits of investing that many investors share.
The world of investing may seem to be rational but in reality it is a highly emotional place. When the markets move, it is often because investors have reacted emotionally to a situation – during periods of volatility, for example, many investors choose to sell their assets not because this fits with any long-term strategy but because it is what other people are doing.
Barclays Behavioural Finance team has shown that if investors are made aware of their bad habits, they can act to reduce the negative effect of these, or overcome then altogether. The six most common mistakes made by the average investor are as follows:
1. Failing to see the big picture.
People tend to focus on investment decisions one by one, without considering the impact on their overall portfolio. This means they may: miss out on opportunities to diversify; cancel out existing investments; or decline opportunities that look risky on their own but that would be a good addition to their overall portfolio.
2. Using a short-term decision horizon.
People tend to base their decisions on how they think a particular investment will perform over a short time period, when what matters is growing wealth over the long term.
The time horizon we pick makes a big difference: historical data shows that, over one month, major share indices have posted losses about 40 per cent of the time. But over five years, we only observed losses about 15 per cent of the time, and almost never over 20 years though it’s important to bear in mind that, past performance is not a reliable indicator of future performance; it may be different next time.
Thus, how we perceive risk is affected by the time horizon we consider: if we consider a short time horizon it is more likely we could experience more loss (which would appear riskier), whereas if we have a longer time horizon it is likely that we could experience less loss (which would appear less risky). Therefore focussing on short term losses may lead us to be overly cautious if what matters is growing wealth over the long term.
3. Buying high, selling low.
People tend to take more risks when they’re comfortable and fewer risks when they’re uncomfortable. Unfortunately, this means they also tend to buy when prices are high (i.e. when they are surrounded by good news) and sell when prices are low (i.e. in times of stress and chaos). So, for most investors, a strategy of buying and holding onto investments for the long term ought to produce better results than trying to time the market.
4. Getting emotionally attached to concentrated investments.
Many people hold onto large investments for sentimental reasons, even though they would be better off selling these investments and reinvesting the money in other things. For example, they may find it difficult to let go of property left to them by a relative; shares in a company they used to work for (or currently work for); or something they bought on a whim some years ago.
These typically add more risk than value to their portfolio and are not things they would buy if they didn’t already own them. One of the most important rules of investing is to diversify so that you don’t “put all your eggs in one basket”.
5. Trading too frequently.
Investors generally do too much, too often. In volatile markets, in particular, people have a strong bias towards wanting to do (or be seen to be doing) something about the turbulence they are experiencing – it makes them feel better. However, if their portfolio is reasonably well-structured to begin with then simply doing nothing would often be a much better option.
The more you trade, the higher your costs, and the higher the chance of trading emotionally or based on inaccurate information. Even if you are a highly experienced investor, the best way to respond to market volatility is, generally speaking, to do less than you’re inclined to.
6. Mental accounting – failing to put your money where it is most effective.
People tend to think about their finances in terms of categories and treat each category differently: essentials, holiday funds, savings, inheritance money and so on. This can simplify their decision-making and help them keep track of everything, but it can also lead to inefficiencies. For example, many people keep large balances on credit cards charging high rates of interest while maintaining savings balances that pay low rates of interest.
They may be better off using the savings to pay off the credit cards, but they do not realise this because they have not considered how all of their categories work together and contribute to their overall wealth over time.
Remember: even if you eliminate these bad habits, investments can still fall in value and you may get back less than you invested.
What to do next and how Barclays International Banking can help
One of the best ways to overcome bad investing habits is by working with an expert adviser, to build a strategy that you can commit to and to review that strategy during your investment journey. This is why Barclays International Banking has a team of International Investment Advisers, who are available to clients via our Relationship Management Service . They will work with you and your Relationship Manager to help you understand your investment needs, and help you to build a portfolio that suits your specific goals, circumstances and appetite for risk.
Please note: we cannot offer investment advice to you in the United Kingdom.
Alternatively, you may wish to speak to our dedicated team of Service Executives about how we can support you. To find out more, please call us on +44 (0)20 7574 3212*
You can find out more about how emotions can affect investment decisions and explore the latest behavioural finance research at our Investment Philosophy website
1Based on analysis of the MSCI World Developed Market Total Return Equity index (USD), which has historically posted a loss in 40 per cent of months for the period November 1973 to November 2013. Source: Barclays Wealth Compass, December 2014 / January 2014.
2To qualify for our Relationship Service you must either deposit and maintain a balance of £100,000 or more (or equivalent in another currency or currencies) in cash or investments or a combination of the two with us;
If you have come to live in, or are moving to, the UK as a non-domiciled person, you will qualify for our Relationship Service if you have an annual individual gross salary of £150,000 or more, excluding bonus, (or equivalent in another currency or currencies) and the salary you receive is paid into your Barclays International bank account each month.
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