A mistake we make is to sell investments too quickly
Many people complain they have bad luck investing in shares.
Although luck may play a part, more often than not the problem is one of bad decisions about buying and selling.
Underlying the bad decisions are psychological factors, the study of which is termed behavioural finance.
We allow emotion to interfere with logic when it comes to making choices simply because our brains are wired that way.
Take the global financial crisis, for example.
As a fairly recent event, it is seen by some people to be likely to occur again in the near future, yet such events are rare.
Loss aversion is another problem. People hate losses far more than they enjoy equivalent gains. If you lose $5000, the degree of worry or distress is far greater than the degree of joy you feel if you gain $5000.
This exaggerated fear of loss can cause panic selling which, ironically, leads to loss.
Then there is the issue of "probability neglect".
For some reason, we tend to focus on worst-case scenarios.
Yet another mistake we make is to sell investments too quickly when they go up in price while holding on to them too long when they drop in value.
-Liz Koh is an authorised financial adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free by calling 0800 273 847. For free e-books see moneymax.co.nz and
moneymaxcoach.com.
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