Our savings choices are influenced by our behavioral biases and can lead to decisions that are contrary to our investment goals. The AMF (Financial Markets Authority) sums up the most common investment mistakes and provides the keys to correct them.
The choice of savings is influenced by certain reflexes, behavioral biases that can lead to conflicting decisions regarding investment goals. Knowing these biases allows you to objectify your own reactions and make more informed investment decisions. The AMF (Financial Markets Authority) sums up the most common investment mistakes and provides the keys to correct them.
Aversion to loss, uncertainty and change
The fear of losing money drives many savers to invest with low risk but low returns. This fear is stronger than the desire for better returns, because losses have a greater psychological impact than gains. Thus, some investors invest in low-risk assets when they would be more interested in investing in other products and diversify their investments to minimize the risk of loss.
Investors do not like to gamble and prefer to know exactly what the result of their investment will be. Thus, choosing a low-paying savings book, the rate of which is known and guaranteed, seems preferable to them than investing in another product, potentially more profitable, but whose return is uncertain. However, over time, diversified investments in the stock market (such as stocks) usually generate higher returns than guaranteed investments.
It is easier for us to choose the status quo than to change, even if it may lead us to improve the situation. Thus, some investors leave their investments as they are, instead of trying to diversify them. However, as the investor profile changes, so do the needs. That’s why it’s useful to take stock of your investments at different stages of life.
Investors often overestimate the risks associated with financial investments because they only consider changes over short periods. They underinvest in products such as stocks, which sometimes experience large fluctuations in a short period of time. However, for some investments, such as stock investments, the holding period reduces the risk. If it is a risky investment for a period of more than 1 year, then a much less risky investment for a period of more than 10 years or more.
Preference for the present
As the saying goes: “Better one in the hand than two in the house.” Many of us prefer present profits over potential future profits, even if they are higher. Thus, some people prefer to immediately benefit from their money, rather than invest it for their future needs, such as retirement. However, saving as soon as possible will allow them to have capital or additional income after retirement.
People often tend to take into account information that confirms their ideas rather than those that challenge them. Thus, if he believes that the stock market is too risky an investment, he will be more likely to take into account information about crises, rather than long-term results. However, to make an informed choice, it’s best to look for information that doesn’t all point to the same thing and compare the pros and cons.
Overestimation of Rare Probabilities
When we subscribe to a financial product, the information documents we receive describe various risks of loss, even if their probability is sometimes low. This leads us to overestimate the likelihood of a rare event occurring and encourages us to choose less risky and low return products for fear that a catastrophic event will result in the loss of a significant portion of the investment when it has little chance of success. happening. However, if no investments in the financial markets can guarantee the invested capital, then diversification allows you to protect yourself from the very possibility of rare events.