How to better avoid investment mistakes

Written by Burlington, VT Financial Advisor Katie Bensel | July 1, 2021

Avoiding Action Bias Investment Mistakes Through Patience and Planning

We would like to believe that economic decision making is based solely on rational thinking. However, it has been found that up to 70% of economic decision making is emotional and only 30% is rational.¹

Let’s add to this the fact that humans are biased towards action. We prefer to see action rather than inaction, even if that action is not beneficial for long term results. This action bias is further emphasized in times of loss. Once we have experienced a loss, the urge to act intensifies and may lead us towards poor investment decisions.²

Are we doomed by human nature to be bad investors? Not necessarily. In order to defend against action bias, we need to utilize patience and planning.

Patience in investing means you have the ability to stay calm in the face of adversity or loss. Individuals with patience are able to stay the course through market volatility. Patience can assist by reducing the role emotions play in driving investment decisions.

Planning is key when it comes to long-term investment success. Once you develop an investment plan with a trusted financial professional, this plan can be utilized as a weapon against action bias. Developing this plan with a trusted financial advisor adds an extra layer of support. With the support of a financial advisor and an investment plan, you now have a sounding board to lean on when you are presented with difficult times, like a market downturn.

When investing, sometimes doing nothing is the best thing to do. One Day In July financial advisors develop investment plans for investors to support their patience and long-term financial success.

1. Maximizing the Emotional Economy: Behavioral Economics, Gallup, https://www.gallup.com/services/170954/behavioral-economics.aspx
2. The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy by James Montier.