When you need to process information, it’s common to take shortcuts and rely on bias. It’s an approach that can be useful in some situations, but it can also lead to decisions that aren’t right for you.
If you’re making financial decisions, you know you should focus on facts, but emotions and other influences can creep into the process.
Last month, you read about some of the ways bias may affect your financial decisions. From herd mentality to confirmation bias, it can have a larger effect than you think.
So, what can you do to reduce bias? Here are five effective ways to focus on what’s important.
1. Learn to recognise when bias could be affecting you
One of the first things you can do to reduce the effect of financial bias is simply be aware of its existence.
Understanding why bias happens and when it may affect your decisions means you’re more likely to take your time to think things through.
Asking yourself questions can be useful:
- Is this investment appealing just because others are buying shares?
- Am I dismissing information because it doesn’t paint the picture I want?
- Have I researched my other options?
Sometimes just remembering bias can occur is enough to make you take a closer look at your decisions.
2. Take your time when making financial decisions
While making quick decisions can be useful in some aspects of your life, taking a step back and giving yourself some time is often valuable when it comes to one’s finances.
Decisions around investing or your retirement could affect your wealth for years to come. So, it’s worth giving them the attention they deserve and thoroughly researching your options.
You’re more likely to overlook important information if you make a snap decision. To compensate for this, you may instead rely on biases or gut feelings. While it may feel right at the time, it means you could be making decisions that don’t make financial sense.
3. Tune out the short-term investment noise
One of the reasons biases affect investing is that it can be all too easy to focus on short-term market movements.
A company’s shares soaring or tumbling dramatically in a day makes a great headline or talking point among friends. But rarely is it something you should act on and it’s easy to attach too much importance to these short-term results.
When you first create an investment strategy, you should set out your long-term goals and how you’ll achieve them. Investment decisions should focus on the long term to reflect this. While looking at long-term performance may not be as exciting, as the peaks and troughs often smooth out, it can help you stick to your plan.
While it can be difficult, tuning out the noise of market volatility can help you focus on your overall investment strategy and long-term financial plan.
4. Scrutinise the decisions you make
When making financial decisions, playing devil’s advocate can be useful. It can help you question why you’re making certain choices and fully explore alternatives.
If someone else asked your advice, what questions would you ask? Would you be satisfied with the way they interpreted the data? Trying to look at your decisions from an outside perspective can be valuable. It allows you to re-evaluate the information and see if you draw the same conclusion.
5. Work with a financial planner
Sometimes, simply having someone to discuss your decisions with can help highlight where bias may be occurring.
As financial planners, we work with people to create financial plans focused on facts and long-term goals. Having a tailored financial plan centred around your goals can give you confidence and mean you’re less likely to act on bias.
We’re here to answer your questions too. So, next time you see an investment that you’re tempted by, but you aren’t sure if it’s right for you, you can contact us. Having someone to turn to reduces the likelihood that you react to news or information quickly, and it provides more time to process it.
If you’d like to arrange a meeting to discuss your investments or overall financial plan, please get in touch.
Risk warnings
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.