Investment typically involves a trade-off between risk and reward. Benjamin Franklin once said “The investor’s chief problem – even his worst enemy – is likely to be himself”.
In practice, people make judgments and decisions that are based on past events, personal beliefs, and preferences.
Sometimes these beliefs can lead people away from rational, long term thinking. Financial planners and investors alike should learn that successful investing comes from reigning in emotions and overcoming their biases.
Diversification is an investment technique that involves building a portfolio of funds that include exposure across different asset classes. History has shown that there is no way of predicting what asset class will be the star performer each year, or even within each asset class what sector will out perform. This is why diversification is key.
Establishing financial goals and staying the course during market highs and lows can help you achieve your investment goals. We would all like to sell when the market has peaked, just before the market moves downward and then get back into the market at the bottom, just before the recovery begins. The trouble is historic investment performance and investors experience of investment performance may not always be aligned due to investor emotions and biases. Is that a tongue twister?
Although investors cannot avoid all biases, they can reduce their effects. This requires understanding one’s behavioural biases, resisting the tendency to engage in such habits, and developing and following objective investment strategies and trading rules.
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