Your Behavioural Investing Biases Could Be Hurting Your Portfolio Returns
Investing isn’t just about numbers, it’s about mindset. Even the most experienced investors can fall victim to psychological traps that influence their investment decisions and ultimately affect their returns.
Identifying and understanding these tendencies can make a big difference in how you manage your portfolio and stay on track toward your long-term goals.
In this article, we’ll explore two common behavioural biases that could be quietly shaping your investment choices, and how to flip the script to your advantage.
Loss Aversion: Why You Feel Losses More Than Gains
Have you ever noticed that losing $100 feels way worse than the joy of gaining $100? You’re not alone.
Psychologists Daniel Kahneman and Amos Tversky found that losses feel nearly twice as impactful as equivalent gains do.
‘Loss aversion’ can lead investors to make impulsive choices that aren’t in their best interest, such as:
- Panicking and selling when the market dips.
- Selling winning investments too soon but holding onto losers too long (the disposition effect).
- Playing it too safe with low-return investments like cash, instead of shares that may perform better over time.
After a major market crash, moving entirely to cash might seem like a smart way to protect your money and avoid further losses. But Vanguard research shows that investors who did this had an 87% chance of underperforming a balanced 60/40 portfolio, with an average underperformance of 13.3%.
Moral of the story? Trying to avoid losses by fleeing the market can actually hinder your long-term results.
Recency Bias
Recency bias happens when we place too much emphasis on recent events and ignore the bigger historical picture. While it’s natural to assume that recent trends will keep going, that’s not always the case.
When markets perform well, investors tend to become more optimistic. After a downturn, they turn bearish. This can lead investors to:
- Chase ‘hot’ sectors or funds just because they’re performing well now.
- Abandon solid investment strategies after a short period of poor returns.
- Overreact to headlines and short-term market swings.
A classic example is the late 1990s tech boom, when investors piled into technology stocks before the dot-com bubble burst, causing major losses for many.
How To Battle Behavioural Bias and Avoid the Hurt?
Behavioural biases affect everyone, but the good news is that a smart, evidence-based investment plan can help keep them in check.
Here are four key principles from Vanguard to guide you:
- Set Your Goals: Clear investment goals act like a roadmap when markets get rocky, helping you avoid snap decisions driven by fear or excitement.
- Stay Well Balanced: Diversify your portfolio across different asset types to reduce risk — what’s hot one year might cool off the next.
- Maintain Perspective: Focus on your long-term plan rather than reacting to every news headline or market move.
- Minimise Your Costs: While you can’t control markets, you can control fees. Lower costs mean more of your returns stay with you.
If behavioural biases have been holding you back, you don’t have to navigate it alone. At BIS Cosgrove, we specialise in helping investors build clear, balanced strategies designed to overcome common obstacles and grow your wealth over time.
Get in touch with us today for personalised advice tailored to your goals and risk tolerance, and start your journey toward smarter investing.
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The material and contents provided in this publication are general and informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
