Psychology Traps that Investors Should Avoid!

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  • 30 Jan 2023

Investments are what make or break your financial portfolio. A good investment increases your net worth, whereas a poor investment destabilises your economic situation. Apart from market volatility, there are certain internal factors that might contribute to financial shortfalls, and those are psychology traps. What exactly are these “psychological traps,” and why should you avoid them? Let’s find out.

  • Overconfidence

Overconfidence is one of the biggest emotional hindrances to investing. You may find yourself criticising your own financial knowledge a bit too much if you end up taking any financial decision without knowing the product completely, based on your ‘overconfidence.’ In doing so, you ignore the prominent red flags and end up making poor financial decisions.

Tip: Never be overconfident when you invest. Being confident is good, but being overconfident is dangerous.

  • Tendency to anchor

Anchoring refers to relying on data you get from analysing the previous performances of the market. While research and analysis are important, you cannot solely and entirely base your investment decisions on how you believe the markets will function because they have in the past.

Tip: To avoid this, educate yourself on current market trends and the scope of the investment property before locking up your funds.

  • Relativity trap

It is only human to feel insecure when someone else has something and you don't. However, if this spirals out of control, you’ll become preoccupied with having the same things as the people around you. In an attempt to achieve this, you invest impulsively, and such investments prove to be flawed.

Avoid this physiological trap—everyone has different needs and requirements in life. For instance, your neighbour may have a six-bedroom house because he/she has 20 family members. You may not need that being the sole individual.

Tip: Be realistic with your life goals and invest accordingly to avoid any financial mishaps.

  • Holding onto loss

Some people make incorrect investments at incorrect times. Nonetheless, markets evolve with time, and losses can turn into profits. However, some investments are absolutely unprofitable, and the longer you keep them, the greater your loss.

Tip: Get out of the loss trap by letting go of the unprofitable investments. It may be a difficult decision, but at times, it is the only one you need to make.

  • Getting swayed by the media

It is alright to listen to the news or read the newspaper to understand how the markets are performing, but basing your entire investment decision on what the media says is a harmful trend to follow.

Tip: The media is not always a reliable source, so consulting a financial expert before making any investment decision will be beneficial.

Avoid falling into these psychological traps when you invest. Emotions should not shape the course of your financial journey, and falling into psychological traps will only hinder your prospects. Be realistic, rely on your financial knowledge, and consult your financial advisor if needed. Be as realistic as possible, and you will surely make some great investments. There are many investment opportunities to explore, so do your research and start investing wisely.

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