While investing, keep emotions at bay

When it comes to investing, the behaviour we exhibit during challenging market conditions is perhaps the largest impediment to our long-term investment success.

We often chase returns, buy and sell short-term, and act on emotions. These easily cloud our judgment; irrational decisions are taken in the fear of missing out on the gains and prejudiced actions are undertaken in the fear of loss.

Behavioural finance explains the psychology of investing and pairs emotions with investments to show how emotions can cause disasters in our investment decisions. It shows that investors are, in reality, emotional, biased, overconfident and myopic, with a distorted concept of their needs. And this behaviour sometimes creates bubbles and seasonal swings.

In stock markets, behavioural finance can help explain situations such as why we hold on to stocks that are crashing or are ridiculously overvalued, why do we jump in late and buy stocks that have peaked in a rally just before the price declines, or why do we take desperate risks and gamble wildly when our stocks descend.

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