Why is investing difficult? Well, it’s simply down to the way we are. One example is our tendency to rely quite heavily on intuition.
Professor Arman Eshraghi from Cardiff Business School is an expert in behavioural finance and explains that we approach judgement and decision making in two ways.
There is thinking and then there’s intuition and instinct.
If someone was to ask you, “do you like pepperoni pizza?”, you would give an instant response to that without thinking too much. And that’s your intuitive response.
This intuition is actually very helpful in various areas of life.
But, when it comes to financial decision making, it’s not helpful.
You want to be in is the thinking mode.
Another problem is that investing requires a long-term perspective. People are naturally far more interested in the here and now and in the immediate future.
Most humans ignore the distant future and focus too much on the present.
This is known as the “present bias” in behavioural finance. And therefore, when it comes to events that happen in the long-term, we don’t plan for them sufficiently because we don’t see them as sufficiently close.
Professor Eshraghi says that the key is to train yourself to focus on the long-term. That way, investing is far less risky than many of us assume.
Very solid academic research shows that investing in, for example, the equity markets tends to be a very relatively safe and profitable approach or alternative to other forms of investing in the long-term.
So, if you have time, and if you don’t get embroiled in the short-term ups and downs of stock markets, you can make reasonably attractive financial returns at relatively low risk.
Essentially, the more you distance yourself from these sorts of unhelpful emotions, the better you can invest consistently and robustly for the long-term.
All this sounds simple. But, in practice, it often isn’t. Some people get the hang of it, but then, for whatever reason, lose their way.
Having a financial adviser you can turn to for an objective opinion is a good way to stay focused on what’s important.
