As individuals, we all have certain biases and beliefs. They stem from different sources and profoundly impact how we think and go about things in our daily lives, including investments. While some notions, such as discipline and patience, help in the investing journey, certain biases can prove to be achilles’ heel for you.
These biases not only hamper your investments but also prevent you from augmenting your riches. They act as a roadblock in attaining financial freedom and addressing life goals. Here are the four biases you should steer yourself away from.
1. Herd Mentality Bias
There must have been occasions when you have been tempted into investing in a financial instrument just because you have seen your peers and others doing it. It’s a fact that most of us end up chasing financial tools that others invest in, believing that such a move will help them build wealth and that they can not go wrong.
Do you remember the dotcom bubble? During that period, many people ended up investing in companies that didn’t possess robust corporate governance models and strong balance sheets. The results were disastrous.
In a nutshell, adopting this mentality can spell doom. You must make any investment understanding the product structure, the associated risks, and aligning them with your goals and risk appetite. Of late, many new fund offers (NFOs) have come to the fore promising attractive returns. Many investors have even invested in them.
However, before you invest in any such fund, make sure to understand the company’s fundamentals and analyse its long-term growth prospects. NFOs don’t have a track record, and investing in them just because others are doing can cause wealth loss. To simply put, don’t follow the herd but carve your own path.
2. Recency Bias
We are severely influenced by the recent happenings in our life. So much so that we quickly tend to forget the past. In this bias, we tend to give more importance to the recent happenings over historical ones. Multiple times investors have fallen for this bias, only to rule later.
This bias came to the fore in March 2020 when equity markets nosedived hit by uncertainties amid the coronavirus pandemic. Investors’ wealth made over time eroded in no time. However, this was not the first time that Indian equity markets had crashed. It happened during the 2008 financial crisis and 1992 stock market scam, only to bounce back stronger.
However, investors gave so much importance to the happening that most pulled out and exited markets fearing further loss. In the process, they converted notional losses into actual ones. Markets scaled new highs and rewarded those who remained committed to their investments.
Those who had remained invested during that challenging phase are now sitting on meaty gains. Hence, it’s advisable to …….
Source: https://www.forbes.com/advisor/in/investing/4-common-investment-biases-you-should-avoid/
