Everyone’s perceptions of life and its intricacies are different and personal experiences can heavily influence an investor’s risk profile – you may actually be your worst enemy when it comes to your financial wellbeing because decisions may be based on personal bias.
While this may be daunting to think about, it’s also important to accept what you can and can’t control such as the stock market, but you can control your own behaviour.
If you are an employer and would like to assist your employees’ future financial health at retirement age, it’s a good idea to choose an umbrella fund investment which offers cost-effective benefits.
How to beat personal bias
Looking at things objectively may be exactly what you need. Speak to industry professionals who are knowledgeable, and each have opinions of their own. The market can be unpredictable and therefore, it’s important to expand your personal perceptions and in so doing, find out more about what drives certain behaviours.
Data shows that it’s the long-term performance that matters most, but an investor’s perception of short-term market fluctuation may cause them to panic and switch.
It may seem like a safe move in the moment, but switching is a dangerous emotional response to panic and risk – it can be detrimental to your portfolio. More often than not, you’ll lock in losses.
As investors we often ignore the power of simple rules and methods:
Don’t spend more than you make
Create meaningful diversification in your portfolio and be patient.
Most of the time, this is all you need to achieve long-term financial success.
So, is there a way that we can override biases? Potentially, yes. The key is to bear these four points in mind.
Have a comprehensive understanding of the unit trust in which you have invested. If you have invested in equity funds for example, it’s important to accept that market fluctuation may have a greater impact on your investment, compared to balanced funds.
Know your financial objectives and stick to them unless there is a specific change in your life’s circumstances such as marriage or having a child.
It’s important to have realistic expectations.
Enlist the services of an independent financial advisor to help you create an investment strategy that is tailored to your needs, risk tolerance and investment horizon.
If you are feeling panic starting to set in, rather speak to a financial advisor instead of making a thoughtless decision. The adage, ‘patience is a virtue’ is fitting in this case.
Don’t forget that investment fluctuation is not a risk in itself; it exists on paper. The actual value loss of your investment only becomes a reality if you withdraw your investment after it has lost value.
If you need any assistance in making financial decisions, speak to an independent financial advisor (IFA). He/she will use his/her experience and knowledge to assist you in drawing up a plan based on your financial objectives.