Yahoo Finance 3 Emotions You Need to Guard Against When Investing
As the saying goes — investing is simple, but not easy.
These days, it’s a relatively quick process to open a brokerage account and then start dipping your toes into the stock market.
With a small sum of money, you can start buying shares of blue-chip companies such as DBS Group (SGX: D05) or Singapore Exchange Limited (SGX: S68).
While it may be easy to allocate money to your favourite stocks, there’s a psychological factor that you should not neglect as an investor.
With your hard-earned money at stake, your emotions may change along with the day to day movements of the stock market.
It is these emotions that could potentially trip you up while investing.
Here are three common emotions you should watch for when investing.
Confirmation Bias
Confirmation bias is a common psychological trait exhibited by investors.
This bias makes you seek out information that conforms to your existing beliefs.
Crucially, you may disregard any evidence that contradicts your views.
The main reason for doing so is pride and ego — you are not willing to admit that you made a mistake, and you also may not want to throw away hours of painstaking research and abandon an investment idea.
Letting confirmation bias cloud your judgement could be a very expensive lesson, though.
By actively seeking out only information that conforms to your beliefs, you may inadvertently miss out on red flags or warning signs.
And that could make the difference between a great investment, and a poor one.
The way to counter this bias is to seek out the bear case for your investment..
If you don’t see any risk in your investments, you haven’t searched hard enough.
Anchoring
Next, we look at the effects of anchoring and how it can distort your investment decision-making process.
Anchoring involves fixing your mind to a particular reference point that may not have any bearing on a decision to be made.
Investors commonly anchor their minds to the purchase price of their investments and base their decisions on whether the market price is below or above this purchase price.
Unfortunately, the market does not care about your purchase price.
Instead, investors will value a company based on its prospects, dividends, and other financial and business metrics.
So, the decision on whether to hold, buy more shares of the stock, or sell the stock should be done independently of your purchase price.
To give an example, let’s say an investor purchased shares of cloud computing company Fastly (NYSE: FSLY) at US$64.50 a year ago.
The share price has, unfortunately, plunged by 73% to close at US$17.15 recently.
The investor may anchor to his purchase price and refuse to sell the stock until it exceeded US$64.50.
That would be the wrong approach.
Instead, what he should be doing is to perform an objective assessment of the business.
If the analysis reveals that the company continues to have strong prospects for future growth, he should scoop up more shares on the cheap.
But if the analysis shows that he had overpaid for his shares a year ago, then he should recognise the loss and find a better investment to park his money.
Home Bias
A third common problem that investors face is home bias.
In short, the home bias makes investors stick to companies listed on their local stock exchange due to familiarity.
I was guilty of this bias for many years and only stuck with Singapore-listed companies and REITs.
By limiting yourself to investing just at home, you are constraining your investment universe.
While Singapore stocks are well-known for delivering good dividend yields, not many of them qualify as fast-growers.
The NASDAQ Composite Index, on the other hand, has numerous stocks that display tremendous growth potential such as Tractor Supply Company (NASDAQ: TSCO) and Adobe (NASDAQ: ADBE).
For investors who prefer Chinese exposure as the country has a large middle-class population, they can invest in Hong Kong-listed stocks such as Want Want China (SEHK: 0151) or Chow Tai Fook (SEHK: 1929) that offer a window into the Chinese consumer.
The idea here is to broaden your investment horizon so that you can maximise your investment portfolio’s potential, rather than limiting it to just one country.
Get Smart: Keep your emotions in check
As you can see, emotions can wreak havoc on your investment process.
By keeping these biases in check, you can improve your investment results by making better investment decisions.
Is now a good time to buy into Singapore REITs? After all, almost 50% of the 44 Singapore REITs were trading close to their 52-week lows in January.
But with the right strategy, mindset and stocks, REITs can still be a powerful source of dividends today and in the years ahead.
And in our upcoming (free) webinar, let us help you further. We’ll show you why REITs remain as one the best retirement assets, where to find resilient REITs that continue to grow and pay dividends, and how to tell if a REIT is worth a spot in your portfolio.
This webinar is free and spots are limited, so register now and save a seat for yourself! Click HERE to register for free now!
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Disclaimer: Royston Yang owns shares of DBS Group, Singapore Exchange Limited, Tractor Supply Company and Adobe.
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