The Psychology of Investing

How does psychology affect investing?

3 min read

When it comes to money and investing, we are not always as rational as we may think. Investors should always try and keep things in perspective and not overreact to what is in the news and press.

Every human being is driven by emotions which are key drivers of our behaviours, and these behavioural patterns contribute to our way of investing. But, it’s really important to not let emotions or impulses drive investment choices, nevertheless some investors just can’t help themselves!

Investment decisions

We now live in a world where we’re surrounded by news, social media and ‘experts’, and you should be mindful of how reliable information actually is and how it applies to you and your situation. Emotions such as excitement, fear and being scared also play a part somewhat in making 'impulsive' decisions.

The following five principles will help you get on top of some key issues that affect everyone who invests their money.

1. Set investment goals
Successful investing begins by setting measurable and attainable investment goals and developing a plan for reaching those goals. Keeping your plan on track also means evaluating the progress on a regular, ongoing basis. Whatever your personal investment goals may be, it is important to consider your time horizon at the outset, as this will impact the type of investments you may consider with the aim of helping achieve your goals.

Committing to investment goals will put you on the path to building further wealth. It stands to reason that investors who take the time to plan for the future are more likely to take the steps necessary to achieve their financial goals.

2. Invest as soon as possible

It’s easy to say that it is better to invest early, but why? The benefits of investing early are numerous and should not be overlooked. However, the benefits that come with starting your investment portfolio as soon as possible will also depend on your attitude towards investment risk and how patient you can be. It is no secret that the well-known proverb ‘time is money’ could not ring more true in today's society.

You might be inclined to ask yourself the following questions: ‘Why bother investing early?’ ‘What difference does it make?’ And ‘Why should I invest now instead of next year or beyond?’ The answer is that if you invest early and incur a loss, you have more time to make up for the loss on investment. Whereas an investor who starts investing at a later stage in life will get less time to recover any losses. Thus, with early investments, your investment has the opportunity of more time to grow in value.

Not only is time your best friend when you’re investing, but you’ll also reap the benefits of compounding, where you’ll you earn interest on both the money you’ve saved and the interest you earn. The longer your money can benefit from the power of compounding, the bigger your gains will be as time goes on, although there’s no guarantee of this.

3. Invest regular amounts

By investing regularly, you could benefit from highs and lows in the market – called ‘pound cost averaging’. This essentially means adding money on a regular basis into your investment. It may be an effective way to invest because if you keep buying when the market falls you could perhaps, over time, turn volatility to your advantage.

Dips in the market, particularly in the early years, could even work to your advantage provided you have committed to investing for a lengthy period.

If your chosen investments have become cheaper to accumulate it means your investment buys more shares or units to keep for the long term. By investing regular monthly amounts, rather than a larger lump sum in one go, you end up buying more shares or units when prices become cheaper and fewer when they become more expensive.

4. Diversify your portfolio

Diversification is spreading investment risk, the goal being to increase your investment success. Your investment portfolio should be split across several types of investment, so your money is less likely to be affected by any single event or economic development.

Where possible, make investment decisions and portfolio allocations based on your personal circumstances and goals and also consider the stage of life you’re at.

5. Resist the urge to panic sell

What this means is that your ability to cope with short-term volatility in your investments is just as important as the choices you make at the outset of your investment journey. But, if say there is a downward movement in the markets, try not to react to these falls, resist the urge to sell up immediately; instead, sit tight and ride it out.

The fear of incurring major losses could make it extremely tempting to sell your investments. Yet, while this may temporarily alleviate your concerns, doing so could put a significant dent in your long-term gains. Investment trends show that leaving your money invested increases the chances of it growing and building your wealth pot.

If you invest for the long term, any short-term volatility shouldn’t affect your ability to reach your investment goals over time. Keep calm and carry on building up your investments. History has shown that over long enough time periods, no matter what challenges the global economy has faced, markets do recover from downturns.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.