Keeping your emotions at bay when making investment decisions can be extremely difficult. Research from the U.K. found that half of all investors had made an impulsive investment decision, with two-thirds of them later regretting that decision. Fear of losses, excitement and the fear of missing out were all listed as some of the reasons for making these impulsive decisions.

Behavioural economics examines how our biases and emotions can affect our investment decision-making process, which in turn can lead us to act irrationally. When it comes to preserving the value of your investments, understanding these behavioural tendencies can help you to make better investment choices and avoid costly mistakes.

Let’s explore four key behavioural economics traits and the impact they can have on the value of your investments.

Loss aversion: the fear of losing

Loss aversion is the tendency to feel the pain of losses more than the joy of gains. In investing, this can lead to overly cautious behaviour or overreactions to market downturns.

While a cautious approach can align with the goals of capital preservation, excessive loss aversion can lead to:

• Avoiding opportunities provided by slightly riskier assets, such as equities (shares), which typically provide inflation-beating returns over the long term.
• Keeping too much money on the sidelines, which erodes your purchasing power over time due to the impact of inflation.

How you can manage it:

• Focus on the long-term: remind yourself that markets have always recovered eventually, and short-term market fluctuations don’t necessarily lead to permanent losses.
• Diversify: a well-diversified portfolio can reduce the fear of losing all your capital.
• Work with an advisor: professional guidance can help balance risk and reward objectively.

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