People think and act according to certain patterns, even when they are often not aware of it. In doing so, "cognitive biases" frequently creep in. Five examples of psychological traps that lead you astray when it comes to investing.
1) Compulsive comparisons
"Fomo" is the name of a phenomenon that affects more than just investing. The acronym stands for "fear of missing out" - the worry of losing out. What is meant is the fear that others are living better, having more fun - or simply earning a higher return. The media world reinforces the impression that you are constantly missing out on something, when it comes to investing too. Every day there are "hot stocks", new "insider tips" and big promises of returns.
The thought that others might be seizing return opportunities you yourself are leaving on the table preys on quite a few minds. It's stressful and it can get expensive. It tempts you into trading unnecessarily often and usually results in a portfolio thrown together at random. Building wealth, however, requires a long-term strategy and the patience to stick with it.
2) The hindsight error
When you look back on a development, you sometimes think it really couldn't have turned out any other way. Psychology calls this "hindsight bias". This distortion in the way information is perceived plays a role in investing too. In retrospect, for instance, it often seems "inevitable" that stock markets rose or fell over a particular period. You're always wiser after the fact.
The future is unknown and cannot be foreseen, not even with expert knowledge. Even when the course of events seems perfectly logical in hindsight, forecasts are always highly speculative and uncertain - just like an investment strategy that relies on them. It is better, when investing, to not get drawn into such speculation in the first place.
3) Deceptive successes
The successful stand in the spotlight. They are more readily credited with the ability to be successful in future too. This attitude leads into the "hot-hands fallacy": the probability that a success will continue is systematically overestimated. One example in investing is the tendency to rely on best-of lists when selecting actively managed funds. If a fund holds a top position in rankings, that must be down to the skill of the fund management - or so the assumption goes. Yet only very few funds manage to hold their top position over several years.
In Germany there are thousands of active funds. They pursue various strategies and cover all sorts of investment focuses. By the rules of probability alone, it is therefore fairly certain that some of them have set their focus precisely where prices have recently risen especially sharply. Whether such trends will continue, however, is written in the stars. Here too the rule applies: you're only wiser after the fact.
4) A leaning towards the familiar
You find a product great, you have high expectations of the producer, and you invest in its shares. The quality of the product may speak well of the manufacturer, but it tells you nothing yet about the balance sheet and the share's performance. It's much the same with "home bias". This refers to the fact that the domestic stock market is frequently overweighted in securities portfolios. The phenomenon can be observed internationally. Familiarity with your own country does not automatically lead to better assessments of market potential. Through "home bias", investors take on higher risks and miss out on many return opportunities. You are protected from this by an investment strategy that diversifies the portfolio as effectively as possible.
5) Thinking too short-term
Which would you prefer, 90 euros in hand right now or 100 euros in a year? And what if you had to choose between 90 euros in four years and 100 euros in five years? These questions, in various forms, have been the subject of numerous psychological studies. The answers tended to come out similarly. The phenomenon is called "hyperbolic discounting": in both cases the gaps between the payments are actually the same. Yet most people spontaneously want to secure the smaller amount rather than wait a year for it - even though they come off worse doing so. If they have to wait anyway, they calculate more rationally and choose the larger amount.
When it comes to investing, even that isn't always the case. A bird in the hand is worth two in the bush: guided by this motto, many people even invest over longer periods in overnight and fixed-term deposits instead of making use of the long-term return opportunities of the stock markets. But what the right investment is depends crucially on your investment horizon and your investment goals.
Do you want to keep money available in the short term, for example for unexpected purchases? With the interest account from quirion, you keep your flexibility and secure an annual interest rate of currently 3 percent. The global ETF portfolio delivers more return opportunities for building wealth over the long term: it gives you a stake in around 8,000 shares from over 70 countries. The investment strategy is forecast-free and is based on the findings of capital market research. That way, you automatically steer clear of the psychological traps of investing.
