You do not have to carry out too much research to see there is a wide variety of opinion on most issues, often from highly qualified and articulate individuals.
And the things you really want to know – what is going to happen and how you can make money from it – are sadly unobtainable.
Your best chance of improving your investment performance could come from turning inward and examining how you make decisions.
There are a number of psychological quirks that we are all prone to at one time or another that can severely impact your investment performance.
Learning to spot and replace these with more rational thought processes could end up paying dividends.
Here we look at a few of the well-understood psychological traps investors fall into.
Holding on to losers
This is a form of "anchoring". It consists of hanging on to investments that have gone bad until they return to zero, or some other arbitrary figure, rather than looking for an alternative that has a better chance of making money.
It is hard to admit that you were wrong and this probably plays a part in the thinking that leads us to make this mistake.
In a recent blog, FE Trustnet editor Josh Ausden wrote about his struggle with this issue.
Mental accounting
This is a way of looking at your financial situation in little boxes rather than seeing it as a whole. You allocate certain funds to different purposes, perhaps allowing yourself more freedom with a certain sum and less with another.
You may hold a pot of high-risk, speculative investments that you will not touch while investing another pot of money in an account you treat more loosely. This is irrational, as you will end up with the same result if you have one balanced portfolio.
You may also be investing money while you have outstanding debts, which makes no sense unless you can be sure of obtaining a higher rate of return on your investments than that you are paying on your debts. And there is not much that is “sure” about investing.
Gambler’s fallacy
This consists of thinking that if a certain event has happened enough times, the opposite must be imminent.
For example, if you have tossed a coin 49 times and it has landed on "heads" every time, then you think the chance of it being "tails" next time is higher. It is not: the chances are 50/50 on each single throw.
Applied to investing, this way of thinking could lead you to sell out of a fund which has done well for a number of years, assuming it is going to come a cropper soon.
This is not the case. While funds can go in and out of style and suffer in certain market conditions, this is due to specific facts about how they interact with markets and you are no more likely to tie the market correctly using this "intuition" as you are by doing the hard work of research. You’re just pinning the tail on the donkey.
The same is true in reverse, of course. The fact that emerging markets have underperformed for three years makes them no more likely to outperform next year than if the opposite was the case.
Or, to put it another way: "Past performance is no guide to future performance."
Herd behaviour
It is much easier to be wrong if everybody else is as well: there is less stigma attached. Sticking your neck out and being proved wrong is not a nice experience.
This can be a major factor when it comes to choosing funds. There are a lot of funds that keep getting bigger and bigger, even if their performance is not much better, or even better at all, than other alternatives in their sector.
Marketing is one reason, but another is the phenomenon of herd behaviour: "If I’m going to be wrong I’d rather everyone else is too."
Overconfidence
We are not very good at admitting our weaknesses to ourselves and we don’t like having to hold our hands up to making a mistake.
We all like to think that we have special abilities – our intelligence, our qualifications, our experience or our judgment.
Sometimes we are lucky and we are likely to ascribe this to skill. With bad luck, we are more likely to see it as it is.
You are unlikely to learn much about your investing abilities if you cannot see where and when you made mistakes, so being more honest with yourself here – which is unlikely to come naturally – could help boost your returns in the longer run.
