With market volatility increasing at times in recent months, Kiplinger’s Anne Kates Smith says investors should be particularly careful not to let emotion and behavioral biases impact their investment decisions.
“What’s the harm in a little volatility now? Nothing, inherently,” Smith writes. “As Jay Mooreland, a financial planner who writes The Emotional Investor blog, puts it: ‘Volatility doesn’t cause losses. It’s investors’ reaction to volatility that causes losses.’ And those reactions are deeply rooted in the biases and behavioral traps that are part of human nature.”
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With the help of William Martin, a financial psychologist at Aequus Wealth Management Resources, Smith looks at a number of behavioral biases that can drag down your portfolio. Among them: confirmation bias and herding.
How can you battle your biases? “One way to do so is to stop focusing on a benchmark. (Turn off the TV, and don’t obsess over your account statements!),” Smith says. “Instead, be mindful of what the money you’re investing is meant for and how it’s invested to meet those personally meaningful goals. Are you investing for retirement income? Educational funds? A down payment on a house? Different goals dictate different strategies. Crafting an investment policy statement — and an exit strategy before the going gets rough helps take the emotion out of buying, selling and rebalancing decisions.”