Understanding How You Think About Investment Decisions May Lead to Better Outcomes
August 22, 2024
Understanding your thought process when making investment decisions may lead to better results.
This is an important issue and over the years, a favorite topic for this column is investor behavior. This is different than how investments work.
It focuses on you as a person and not the investment. The influences you face when making investment decisions can be more because of your bias which influences your investment decision-making process.
Buying and selling investments and the timing of those transactions can be challenging for many people. Behavioral finance can explain the influences that an individual might consider when making investment decisions.
We know from the past that stock markets do very well over the long term. We have a century of data that supports this comment.
We also know that many investors do not have successful outcomes. Their returns are far less than the market returns and often investors lose money.
Why does this happen?
Academic research has been useful in understanding investor behavior. In my opinion, academic study on investing is far more interesting when studying people and what influences them than researching the investments themselves.
For example, past research included “recency bias” which means that equally important research has more influence on investment decisions when it is the more recently received.
The significance of information should be key and not the order in which it was understood.
Understanding the influences you face when making a decision can be of great benefit for investors. You will make investment decisions but have better clarity on how that decision is influenced.
Understanding your investment making thought process can lead to better results.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com. ACPI is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Watson Securities, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Watson Securities and covered by the CIPF. Financial planning services are provided through Watson Investments. Watson Investments is an independent company separate and distinct from ACPI.
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