Investing bias can occur both consciously and unconsciously.
Many investors believe that it’s only their instincts that help them select the right financial product for a particular goal, but often, these first impressions are guided by their own inherent biases.
These biases normally creep into the investing and selection of any preferred financial product process when those involved in the decision-making process are forming their first impressions of a particular product based on their recent performance.
Biases also steer those involved to having a preference for one financial product over another on the basis of possessing personal choices that they like or identify with, or in the reverse, dismissing them as potential investment avenues because they don’t possess them.
However, this isn’t the same as looking for the right financial product that carries the relevant risk and return ratio for that particular financial goal.
For example, bias inducing factors can include
# past experience of investing in that particular financial product
# actual return earned
# ease of investing in that particular financial product
# hassle-free redemption process
# lock-in and liquidity
# Risk and return reward
Whether we’re aware of it or not, these elements can all invoke bias.
Which types of Investing biases do I need to be aware of?
# I will invest in those products which my parents were using:
Most of the time we preferred those financial products which our parents used for investment. We do so as we lack the knowledge about new products in the market or we want to use the tried and tested one. Sometimes there is pressure from the elders to use those products. But because of this bais most of the time if an investor chooses debt products only then they may not get inflation hedged returns.
# I will invest in those products which are offering the highest return:
Most investors’ solo investing motivation is earning maximum return but while running behind the return they never ever access the underlined risk that a particular investment is carrying. If you do not match the risk that particular product carries with your own risk-taking ability then such bais will get you in trouble
# I will follow random advice from friends, relatives, or media news
Many people try to avoid paying fees to the consultant if such information is available free of cost everywhere. So such investors most reply in friends, family, relatives, a news channel, or WhatsApp group where generic information is been shared and told. Such advice is not given keeping your profile in mind. So just following it blindly without understanding the pros and cons can be risky.
# I will follow the market trends:
This type of bias makes an investor follow the market trends just blindly without accessing self-risk taking ability and as well as the underlined asset’s risk. It is a very risky strategy as the current hot cake most of the time does not match our goal term, risk-taking ability as well as can not fit with the required asset allocation. So in this case without checking the suitability following the market trends is a risky bet.
# I will never invest in the risker asset class:
Many investors believe Equity asset class as a wealth destroyer. When they just follow random advice or follow market trends blindly they burn their fingers in the market and this made them believe that Equity Asset class is not their cup of tea. An equity Asset class is a risker asset class but if you take a calculated risk you can create wealth in long term. But if you are stuck with the bais then you won’t be able to generate inflation hedged return.
If the above-mentioned biases are left unchecked then your investments may not fetch you the returns which it would have been if these biases were not there.
So do not involve your emotional instincts and biases while planning your finances to achieve your financial goals.