Behavioral Biases That Can Lead to Costly Mistakes
The field of behavioral finance focuses on the emotional and cognitive aspects of investing.
This week, Craig Siminski, of CMS Retirement Income Planning, shares an article about six blind spots that can lead to regrettable portfolio decisions — and how investors might avoid them:
It can be difficult to act rationally when your financial future is at stake, especially when unexpected events upset the markets. But understanding certain aspects of human nature, and your own vulnerabilities, might help you stay levelheaded in the heat of the moment.
Every investment decision should take your financial goals, time horizon, and risk tolerance into account. That’s why it’s important to slow down the process and try to consider all relevant factors and possible outcomes.
Here are six behavioral biases, which could also be called mental shortcuts or blind spots, that might lead you to make regrettable portfolio decisions:
1. Herd Mentality
Many people can be convinced by their peers to follow trends, even if it’s not in their own best interests. When investors chase returns and follow the herd into “hot” investments, it can drive up prices to unsustainable levels and create asset bubbles that eventually burst. Joining the crowd and fleeing the stock market after it falls, and/or waiting too long (until prices have already risen) to reinvest, could …
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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 21 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.
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