Whether you’re frantic about finances or calm about creating wealth, investing wisely has a lot to do with adopting the right mindset. Here’s how your psychology can help you make good investment decisions.
As empowered women, when it comes to attitude, we’ve got it in spades. That’s good news considering the way that we think is a vital part of smart investing. In fact, a whole area of study has been devoted to what’s known as behavioural finance. This theory suggests that people’s financial decisions are rooted in their emotional state as opposed to in what’s most logical.
Far from what misogynistic stereotypes would have society believe, women and rationality are a natural fit. This is especially true in the realm of finance where studies repeatedly reveal that women make better investors – especially since we’re more likely to remain calm in times of market volatility. That’s not to say that feelings don’t come into the equation – for both female and male investors.
Behavioural finance pitfalls
There’s no divorcing emotions from the decisions we make, especially ones related to wealth generation. Often all the building blocks of a good investment are in place but because of the fear, greed or panic that determines what, when or why we buy or sell, they fall far short of our expectations. As Forbes suggests: “Investors tend to lose not because of economic conditions but because of human psychology”.
Our level of financial stress as well as our past investment experiences contribute to our investment decisions. For instance, if you need to generate cash fast you may be more reckless than you otherwise would be or, conversely, if you’ve recently lost on the stock market, you may be wary of taking a big risk. What’s more, if you do well on the stock market, the pleasurable dopamine hit this provides your brain makes it more likely that you’ll invest more in pursuit of the same “high”.
There will always be data to support our confirmation bias – the tendency to pay close attention to information that confirms our beliefs while overlooking information that doesn’t. Our job is to keep a cool head amidst the market information that bombards us.
The right investment mindset
So how do we strike the right balance between emotions and logic when it comes to investing?
- Don’t make impulsive decisions based on media buzz – look at long-term market patterns.
- Focus on your end goal. Consider your financial and emotional needs and devise a solid investment plan that aligns with this.
- Diversify. Spread your wealth across different investment vehicles, asset classes and sectors – this reduces risks and mitigates losses.
- Ask those in the know. The right financial advisor can help you silence the noise and adopt an objective and informed viewpoint when constructing an investment portfolio that meets both your emotional and financial needs.
