This week’s advisor is Felicity Thomas, from Shaw and Partners. Here’s what she said in response to Sam’s question:

This is a great question and even more relevant than ever over the past few years with turbulent market conditions.

One crucial piece of advice that I consistently share with all clients is the importance of keeping emotions out of investment decision making. 

This advice is rooted in the field of behavioural finance, which recognises that human emotions can often lead to irrational and detrimental investment choices. By adhering to this principle, you can stay focused on your financial plan and increase your chances of achieving their long-term financial goals.

Emotions, such as fear, greed, and overconfidence, have the potential to cloud judgment and drive us to make impulsive investment decisions.

During times of market volatility, it is common for investors to panic and sell their investments, driven by the fear of further losses. Conversely, during periods of exuberance, investors may become overly optimistic and chase high-risk, high-reward opportunities, driven by greed.

These emotionally-driven actions can disrupt a well-thought-out financial plan and result in poor investment performance.

The 5 that I want to highlight are: 

• Loss aversion - we tend to dislike losing something more than we enjoy gaining something of the same value

• Confirmation bias - we tend to favour information that supports what we already think and ignore or downplay information that contradicts it

• Herd mentality - people often go along with what others are doing or thinking, even if it might not align with their personal beliefs or judgments

• Overconfidence - people often believe they are more skilled, competent, or knowledgeable than they actually are

• Anchoring bias - we often use an initial reference point, or "anchor," to guide our thinking and subsequent judgments

To counteract these tendencies, it is essential for you to recognise and understand your emotions when making investment decisions.

By being aware of your emotional biases, you can take steps to mitigate their impact. Setting clear investment guidelines and sticking to a well-diversified portfolio can help mitigate the influence of emotions.

By staying disciplined, adhering to your financial plan, and seeking guidance from a trusted financial adviser, you can navigate the ups and downs of the market with a clear focus on your goals.

Markets reward discipline and I think that is why so many investors fail. STICK TO YOUR PLAN!

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