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How to avoid these 4 behavioural investment traps

Photo of Kajanga Kulatunga By Kajanga Kulatunga

min read

Investors should plan for a range of possible outcomes – not follow the herd.

Investment markets can be unpredictable. Just when you get used to enjoying a prolonged period of strong returns, there can suddenly be a wild sharemarket rollercoaster and you begin wondering whether to jump off.

Consistently strong investment markets can breed overconfidence and tempt investors into taking undue risk. At the other end of the spectrum, volatile markets can make people nervous and sell out as panic sets in.

Many people do not realise that the greatest impact on their investment returns may be their own behaviour.

Here are four behavioural traps investors should be aware of:

1. Making decisions during market volatility

When markets are up one day and down the next, it is easy to be nervous about investing and this is when investors risk making irrational decisions. Remember that market volatility is inevitable but markets tend to bounce back over the long term. Although there may be good reasons to sell, remember that by selling when markets are low may only crystallise losses. Stay focused on your long-term goals and try to ignore market “noise”.

2. Becoming overconfident in strong markets

Many decisions people make during strong markets will probably come right, because the entire market is rising. This will make many feel smart and more confident about their ability to invest. Remember that returns from rising markets are not an indicator of investment skills. It is how people behave and how their investments perform during times of market distress that are the signs of a good investor.

3. Avoiding herd mentality

It is a natural human tendency to position ourselves relative to others and to feel the need to “keep up”. But this can lead to poor financial decisions. New investment trends can easily get traction in the media and create conversations among friends and family.

It is tempting to want to take part in the latest trend, but it’s important to take the time to assess any investment on its own merit, and with your personal goals in mind.

4. Being swayed by recent events

We are wired to give undue weight to the most recent events, especially when investing. With the Global Financial Crisis still fresh in the minds of many, in 2010 the common view was that Australian shares could do no wrong and global shares were shunned. Then, in the five years that followed, global shares provided far better returns than Australian shares. This meant that investors who had sold out of global shares missed the rally. (Unhedged global shares returned 8 per cent per annum more than Australian shares over five years 1/10/10 – 30/09/15. Based on MSCI All Country World Index and ASX/S&P 200 Accumulation Index.)

Now that global shares have had several years of strong returns, many investors are interested again, yet the best returns have probably been made. Instead of chasing yesterday’s winners, it is usually best to remain patient and stick to your personal plan.

We often go to considerable efforts to maintain the belief that we are in control of situations when we really aren’t. It is the same for investments: no one really knows what lies ahead for markets.

The best investors can do is plan for a range of different possible outcomes. If the most likely future paths point towards not achieving your goals, you may need to reset your expectations. Revise your goals, or perhaps change your savings plan to make up for the difference between what you will need and what your investments may provide. Consider speaking with a financial adviser.

About the author

Kajanga Kulatunga is a portfolio specialist at NAB Asset Management @NAB. Kajanga specialises in global shares and leads research in behavioural insights. He is the founder of the Centre for Investor Behaviour, a non-profit research platform based in the United States. Follow NAB Asset Management on LinkedIn or visit

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