3. Emotional decision-making due to lack of investing psychology

“I’m not emotional about investments. Investing is something where you have to be purely rational and not let emotion affect your decision making – just the facts” – Bill Ackman

Investing is far more about psychology than it is intelligence which is why another mistake investors often make is allowing emotions, such as fear or greed, to drive their investment decisions. Emotion-driven decisions can lead to reactionary buying or selling, which can harm investment returns. Instead, investors should develop a well-defined investment plan and adhere to it, focusing on long-term goals rather than short-term market fluctuations. Staying calm during short-term market fluctuations and not being impulsive should lead to being a long-term investor who has fully researched their chosen investment thus remaining invested and when successful, being rewarded over multiple years rather than months. The compounding impact of fewer trading costs and greater total returns can have a significant multiplier effect on an investor’s long-term portfolio performance.

In addition, we can often become emotionally entangled in our investment, and might not be willing to see the rational and logical challenges that need dealing with. Our brains can trick us into believing that something has more merit than it does. We have many unconscious biases, which act like shortcuts for our brains to help us make decisions, however, they can also prevent us from making the best decisions. There is one called the ‘affinity bias’ which means that we could make uneconomical investment decisions if we believe an investment aligns to our values. For example, if we invest in an ESG company because we believe in their vision and values, we may not pay adequate due diligence or be open to changes that need addressing if they are not performing well.