Your investment style will shape how you choose your investments and manage them over the long term. The good news is that your style isn’t set in stone, and you can make positive changes so your approach to investing aligns with your strategy.
While facts should be the main driver of investment decisions, they aren’t always.
Indeed, if you give two investors with the same goal the same information, they could make different decisions because of their investment styles.
For example, one investor might take a more aggressive approach and choose the option that has the potential to deliver higher returns, but also poses a greater risk. In contrast, a conservative investor may favour an investment that is likely to experience less volatility, even if the returns could be lower.
Psychological factors influence your investment decisions
Psychological factors affect your beliefs and motivations, which can dictate how you respond to decisions, including financial ones. In some cases, they could mean you stray from an investment strategy that’s been tailored to your needs.
It can be difficult to recognise when these factors might be influencing your decisions, as they may be unconsciously playing a role. For example, they may include:
- Emotions: Your emotional state will affect how you view different opportunities and how you respond. If you feel excited about a prospect, you might be more willing to overlook the associated risk.
- Bias: Unconscious bias refers to the shortcuts your brain makes to speed up decisions. This could create blind spots and mean you don’t fully consider data, even when you have access to it.
- Experiences: Your past experiences could also alter how you view a new opportunity, even if the circumstances are different.
Imagine you previously invested money on a whim. You didn’t consider your circumstances and took more risk than was appropriate for you, and you lost money as a result. Even if your situation changes and you balance the risk, this experience could mean you’re reluctant to invest, or you’re overly cautious. As a result, an experience has changed your investment style.
4 simple ways to adjust your investment style and stick to your strategy
Your investment strategy should set out how you’ll invest your assets and should be based on a range of factors, such as your investment goals, risk profile, and other assets.
In some cases, your investment style might mean the decisions you make don’t always align with your strategy, which could prevent you from achieving your goals.
Here are some steps you can take to identify when your investment style might have a negative effect and take control.
1. Refer back to your investment strategy when making decisions
Your investment strategy has been tailored to your circumstances. So, when you’re making an important decision, refer back to it. Remembering your reasons for investing and the factors you considered when creating a strategy could help you focus on what’s important.
For example, if volatility means you’re feeling nervous and tempted to sell investments, keeping your end goal in mind could help you stay the course.
2. Focus on long-term results to reduce the effect of emotions
Emotions are often short-term reactions. You might feel excited when an investment performs well or frustrated when you feel like you’ve missed an opportunity. Yet, reacting to emotions could have a long-term effect on your finances.
Focusing on your desired long-term results could help keep emotional impulses in check when you’re making decisions.
You might want to implement a pause when feeling emotional. Giving yourself a couple of days to think about your decisions could allow emotions to settle so you can look at the options objectively.
3. Review your decisions alongside investment performance
Carrying out regular reviews of your investment portfolio could highlight whether you’re on track and whether adjustments might be needed.
As well as looking at the returns, review your actions. Did you make any decisions that you later regretted, and, if so, what drove them? Identifying where your investment style may not have aligned with your strategy could help you avoid repeating the same potential errors.
4. Work with your financial planner
Working with a financial planner means you’ll have someone to talk to about your decisions, and they could highlight when you’re straying from your investment strategy.
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Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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