Personal Finance: Six rules to follow to make better investment decisions
Richard Ross, director of wealth managers Chadwicks, says a strategy is the best way to keep finances healthy.
Behavioural economics is the branch of economics that looks at the ways our decisions are influenced by our personal biases. Understanding more about how these can lead to poor decisions is key to successful investing
So, here’s six rules you can use to start making better investment decisions.
- The past is just that, past.
You are where you are; you need to look objectively at the prospects for your investment going forward, not be swayed by how much you’ve made or lost in the past.
- Beware of ‘anchoring’ to a recent price peak.
The market falls over the last month have been very scary but stand back and look at performance over a year, three years, five years.
You’ll find the further back you stand the less scary it is.
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- Treat gains and losses the same.
This is really difficult as we feel the pain of, say, a 10 percent loss far more acutely than we feel the equivalent joy of a 10 percent gain.
We should treat those imposters the same – unless we are selling or buying they are irrelevant anyway.
- Markets are very good at setting values.
If you happen to beat the market it is likely to be because you’ve been lucky or you haven’t appreciated all the risks associated with your investment.
By all means buy shares in a company because you like it but don’t kid yourself you’re going to beat the market.
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- Ignore the noise.
We’re herd animals and its hard to resist joining in when everyone around us seems to be heading in the same direction – even if that is over a cliff.
Resist FOMO (Fear of Missing Out) – there’s a reason why the proverb ‘fools rush in where angels fear to tread’ has persisted.
- And finally…have a process.
The best protection against our behavioural biases is to decide on a strategy well in advance, before the world feels like it is falling apart - and stick to it.
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