BENEFITS OF AN INVESTMENT

18 Jul

BENEFITS OF AN INVESTMENT PLAN TO AVOID BEHAVIOURAL TRAPS

Posted at 11:42h

Investors often exhibit irrational behaviours that can impact badly on investment outcomes. These behaviours can arise due to a variety of factors including:

  1. Emotional influences – such as fear, greed and herd mentality.
  2. Cognitive bias – such as confirmation bias (seeking information that supports existing beliefs) and overconfidence bias (believing one’s abilities are better than they actually are).
  3. Lack of information or knowledge.
  4. Short term focus – leading to impulsive decision making.
  5. Influence of media or social networks – amplifying the influence of emotions and cognitive bias.

The Power of Planning

Having a well-defined investment plan can help investors avoid behaving irrationally in several ways:

Setting clear objectives

An investment plan helps investors define their financial goals and objectives. By establishing specific targets, such as saving for retirement, funding a child’s education, or achieving a certain level of wealth, investors can maintain a long-term perspective and avoid getting swayed by short-term market fluctuations or emotional reactions.

Establishing a risk tolerance

An investment plan involves assessing one’s risk tolerance, which is the ability to withstand fluctuations in the value of investments. By understanding their risk tolerance, investors can select appropriate investment strategies that align with their comfort level. This helps prevent impulsive decisions during market volatility and reduces the likelihood of panic selling or chasing short-term gains.

Diversification and asset allocation

A well-designed investment plan includes diversification and asset allocation strategies. Diversification involves spreading investments across different asset classes, sectors, and geographical regions to reduce exposure to any single investment. Asset allocation refers to the allocation of investments among different asset classes, such as stocks, bonds, and cash. These strategies help manage risk and optimize returns based on the investor’s goals and risk tolerance.

Long-term perspective

An investment plan encourages investors to adopt a long-term perspective. It helps them focus on their overall financial objectives rather than short-term market fluctuations. By understanding that markets can be volatile in the short term but tend to rise over the long term, investors can resist the temptation to make hasty decisions based on short-term market movements.

Avoiding emotional reactions

Having an investment plan in place provides a structured approach to decision-making and helps investors avoid making impulsive or emotional investment decisions. By following a predetermined plan, investors are less likely to be influenced by market noise, media hype, or emotional biases. This disciplined approach reduces the chances of buying or selling investments based on short-term market sentiment.

Regular review and adjustment

An investment plan should be regularly reviewed and adjusted as needed. This allows investors to assess their progress towards their goals, make necessary changes in response to changing market conditions or personal circumstances, and ensure that their investment strategy remains aligned with their objectives.

By adhering to a well-thought-out investment plan, investors can mitigate the impact of irrational behaviour and make more rational, informed decisions based on their long-term financial goals and risk tolerance. If you would like to start developing your financial plan, then contact the team at Curve Wealth today.

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