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Be aware of biases

Over the years, psychologists have identified a number of cognitive biases that impact investors.

Anchoring bias, for instance, makes it easy to misjudge the true value of an asset simply because you’re fixated on past performance. Confirmation bias occurs when you seek out information but focus on that which cements what you already believe. Activity bias makes you feel unproductive when you’re not trading frequently.

Risk aversion is probably one of the most powerful bias investors deal with. The fear of losing money can outweigh the pleasure of gaining it, so decisions are rooted in fear.

Being aware of these elements should help you mitigate their influence.

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Stick to the program

One way to avoid emotions is to create an investment plan and stick to it with steadfast dedication. This plan could include a checklist for due diligence and a fixed time horizon for new investments to ensure you’re picking the best stocks and holding them despite volatility.

Integrating a margin of safety is also essential. No matter how confident you are, buying a stock for less than you think it’s worth on the market is usually a good strategy. So is diversification. Having a diverse portfolio can decrease your risk exposure. If a particular stock or industry tumbles, it will affect only a fraction of your investments.

Creating a portfolio strategy could be the key to emotionless and disciplined investing.

Sleep on it

Instead of acting on impulse, when presented with an opportunity, take your time before making a decision. Make a habit of asking more questions and collect as much information as possible. Give yourself a cooling-off period before deciding whether or not to invest.

Doing so will allow you to make decisions with a clear head devoid of urgency.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.