A heads-up to anyone with a 401(k): With the stock market near record highs, the biggest threat to your hard-earned retirement savings could be you.
Your emotions, biases and other mental miscues can lead to psychological traps that cause you to make bad investment decisions.
After making a fortune in hot stocks such as Amazon or Netflix, for example, you might fool yourself into thinking you're as talented an investor as billionaire Warren Buffett. Or you may get stuck on the idea that the longest bull market in history will last forever, or worry a steep drop is imminent. You might also make the mistake of only seeking information that confirms your personal view on where markets are headed.
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The emerging field of behavioral finance, which looks at the relationship between investor psychology and the money-related moves people make, chronicles many of the human traits that can cause errors in decision-making.
"To keep it simple, behavioral finance is the reality of humans being human and making mistakes," says Woody Dorsey, president of Market Semiotics, a Castleton, Vermont, research firm that studies and diagnoses the habitual cognitive errors investors make.
Here are four ways investors' flawed thinking can lead to blunders and how they can avoid those mistakes.