One in two investors admit to making impulsive decisions, and regretting it

While investment decisions should be based on facts, many investors find their decisions are sometimes influenced by emotions. Whether you’re excited about an investment opportunity, or worried about market volatility, keeping emotions in check can help you make better investment decisions.

Research from Barclays in the UK has shown that half of investors admit to making impulsive decisions based on their emotions. While these decisions can seem right at the time, 67% of investors said they go on to regret their choice. Worries during short-term market volatility are often associated with making knee-jerk decisions. If you see the value of your investments fall, it’s natural to want to make changes. However, the study found that it is not just in down markets and other emotions play a role in impulsive investment decisions, including:

Excitement (34%)

Impatience (21%)

Fear (16%)

Letting emotions play a significant role in your decisions can mean you make choices that you wouldn’t normally or that don’t fit into your financial plan.

What can you do to reduce impulsive investment decisions?

While you can’t remove the emotions you feel when investing, there are things you can do to reduce the chance of you making impulsive decisions that you might later regret and recognise when emotions are affecting your thought process.

1. Keep in mind where you get information from

We wrote about this a few weeks’ ago with the Dutch regulator’s warning to the public about ‘finfluencers’ or financial influencers. These are social media accounts that typically do not have a license for the advice they are giving, are not qualified, and are often not transparent in the products they are pushing and the kick-backs they are receiving. You can catch the article here.

In modern life, we are surrounded by news and information from many sources that can affect how we view investments. It’s important to keep in mind how reliable the information is and how it relates to your circumstances.

When asked what influenced their investment decisions, 32% of respondents said “social media” and 31% said “friends”. While both of these can sometimes be useful sources of information, they can also lead to you making decisions that aren’t right for you. The information, even if well-intentioned, can be inaccurate or biased. There’s no one-size-fits-all strategy when investing either. So, while a friend may have made an investment decision that’s right for them, it doesn’t automatically mean it makes sense for you too.

Taking a step back before you make an investment decision can help you review what it’s based on and how reliable the source is. Then consider it in the context of what you are trying to achieve, how it relates to your goals.

2. Have faith in your investment plan

Almost a third (30%) of investors said they’d made an impulsive investment decision due to the “fear of missing out” (FOMO). If you’ve heard of a great investment opportunity, it can be tempting to invest yourself. While some of these may be a good option for you, it’s important not to be impulsive and to weigh them up carefully. We have seen this many times, that by the time a ‘hot investment’ reaches mass media its price is close to the peak, in other words, it is too late. Don’t try and chase the latest hot investment. Instead, have confidence in your financial plan. This can help you look at opportunities objectively and see how they’ll fit into your long-term goals.

3. Keep your long-term goals in mind

Investing can involve a lot of ups and downs. That’s why a long-term plan is important. Ideally, you should invest with a minimum time frame of five years with an investment strategy that reflects this. However, it can still be easy to let short-term market movements affect your decisions and how confident you feel about the decisions you’ve made. Remember, markets tend to go up over time, but not in a straight line.

The Barclay’s survey found that 6 in 10 investors feel like they need to constantly monitor their investments. Keeping an eye on performance can ease feelings of anxiety you may have if investments have increased in value or remained stable. However, it can also mean you’re more prone to reacting to short-term fluctuations in the market. While investment values may fall, historically, markets have recovered. We often speak about the inverse relationship between being able to stick to your investment, and therefore your returns, and how frequently you look at your investments.

While guarantees can’t be made when investing, it’s important to review your investments with a long-term outlook. Reacting to short-term falls could mean you miss out on long-term gains and harm your overall plan. That’s not to say that you should never make changes to your investment portfolio, but, rather, these decisions should be based on information rather than emotions.

Working with a financial planner can help give you confidence in your financial plan. It also means you have someone to talk to if you’re thinking about making changes to your investment strategy, whether based on emotions or other factors. If you’d like to discuss your investments and how they can help you achieve your aspirations, please contact us.