Strategist Reveals Investors’ Worst Pitfalls
Most experts would agree investing in the stock market is not for those of a nervous disposition, but one bank has identified the six key errors investors regularly make, and crucially, how to avoid them.
Strategist Peter Bezak at Switzerland's Bank Sarasin highlighted the six psychological traps or "biases" that trip investors up, in a portfolio strategy note this month. These mistakes include:
Availability bias: With rolling 24-hour news, information overload is always a risk. On the other hand, investors may rely solely on recommendations and tips with which they are familiar, and give greater weight to information that is readily available.
Selection bias: An investment decision can be influenced by how data is represented,for instance, over one year or several.
Overconfidence bias: Overrating one's ability is a common mistake, according to Bezak, and occurs when investors forget their poor investment decisions quicker than their good ones.
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Assessment bias: Another common error is booking profits early, but waiting too long to realize losses.
Confirmation bias: Investors may selectively gather information to confirm their point of view, while avoiding contradictory information. A case of burying your head in the sand, maybe?
And finally, reference point bias occurs when investors are influenced by a factor that should not play any part in the investment decision, such as the purchase price.
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But even if you know which pitfalls to avoid, what should you actually be doing? Bezak said a few simple steps can be taken to safeguard the decision-making process.
Firstly, investors should avoid focusing on specific shares, and diversify their investments. Bezak suggested opting for a portfolio with a combination of cash,bonds, equities and alternative assets to reduce risk but still generate a"respectable" return.
In addition, investors need to determine their risk level – how much risk are they willing to tolerate? And once they've decided they need to stick to it, "in order to profit from a positive trend", said Bezak.
By CNBC's Shai Ahmed; Follow her on Twitter @shaicnbc