5 ways to avoid making poor emotional investment decisions

Making sound financial decisions isn’t always easy and times of uncertainty – such as rampant inflation, rising costs of living, and highly volatile markets – can cause stress and anxiety.

In addition, it’s an unfortunate truth that our human emotional biases can often drive us towards making poor financial decisions.

A study from Barclays found that half of investors admit to making impulsive decisions based on their emotions. 47% of investors also admitted that they often feel anxious about their investments.

Meanwhile, 62% feel the need to constantly check and monitor their investments to succeed. If this describes you, you could be vulnerable to reacting to short-term fluctuations in the market.

It may be sobering to realise that our behaviour can have far more impact on investment returns than how an investment portfolio is made up.

Fortunately, while it may be impossible to remove the emotions you feel when investing, there are things you can do to reduce the chance of making impulsive decisions and recognise when emotions are affecting your decision process.

Here are five things to remember if you fear your emotions may get in the way of making sensible financial decisions.

1. Consider where you get your information

The constant stream of market news and commentary can challenge your investment discipline.

Media messaging is almost always designed to cause anxiety; first there was Brexit, then Covid, followed by Russia’s invasion of Ukraine, and now soaring inflation and the cost of living crisis.

There’s always something.

Whenever you're tempted to react to a news story or headline, take a beat and remember these three things:

• Headlines are written to attract attention
• Scare stories don’t constitute financial advice
• Journalists don’t care about your long-term financial interests.

Before making an investment decision, take a step back and review how reliable the source is and what your decision is truly based on.

2. Take a reasoned approach and keep faith in your financial plan

Good money management requires a reasoned approach to decision-making and impartial analysis of available information.

Behavioural discipline isn’t only about keeping a cool head and investing for the long term; it’s also about having – and sticking to – a sound financial plan designed to help you achieve your investment and lifestyle goals.

3. Don’t attempt to time the market

To lock in the best prices, some investors try to time their entry into the market. There are many problems with this approach, the main one being that it's incredibly difficult to make investment decisions based on short-term data.

Since misjudging the timing means making losses and missing out on gains, even the most experienced investors and fund managers don't attempt to time the markets.

4. Remember that investing is a long-term game

While it can be tempting to try to time the market, it's important to keep your long-term goals in mind and remember the core reasons you have invested your money.

Most of us invest to grow our wealth with the aim of being able to afford a comfortable retirement, or other tangible long-term goal.

Investing with a patient approach – and allowing your money maximum time in the stock market – should give your portfolio ample opportunity to benefit from compounding.

Above all, remember that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the associated risks of each investment.

5. Work with a financial planner to help you to manage your behavioural biases

One of the key benefits of working with a financial planner is that they can act as a sounding board to help you avoid making emotional decisions that could harm your long-term plans.

Having a trusted financial planner by your side to discuss your concerns can help settle your nerves and ensure the decisions you make are right for you and your future financial wellbeing.

Read more: Measuring the true value of financial advice

At Aspira, our entire investment approach revolves around understanding the relationship between risk and reward.

We will work with you to create a long-term plan with your lifestyle goals and aspirations in mind. We will explain what your options are and the pros and cons of each, helping to give you confidence in the actions you take.

Get in touch

If you’re concerned about the current uncertainty, or would like help managing your emotions and finances, please get in touch. Email info@aspirafp.co.uk or call us on 01454 632 495.

Please note

This article is for information only. Please do not act based on anything you might read in this article.

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice. You should seek independent financial advice before embarking on any course of action.

The value of investments and income from them may go down as well as up. You may not get back the original amount invested. Past performance is not indicative of future performance.

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