5 tips to avoid ’emotional traps’ in investing

Monthly Money Question Hour: “Well, I have shares in a company that have now lost 86% of their value, should I just sell the rest to save at least the remaining 1,000 francs?”

Every day I meet people who notice their wealth diminishing. These are not super risky financial professionals or ultra-rich, but normal people whose retirement accounts in securities or investments are all in the red going forward. It’s no different for me: my largest Pillar 3a account is showing -7% and more disturbingly, one of my sons’ money is now at -21% (no, it’s not a crypto wallet).

What doesn’t make it any easier is that the financial service providers often have little information about what they do or don’t do in this situation (or that nothing can be done about it). I don’t know about you, but out of the 7 online providers I use, only one has contacted me in the past 6 months (excluding advertising emails and regulatory matters): “We all look at our portfolios and make adjustments where necessary, if you want to know more, come to the webinar», that was in August, and nothing has happened since. in dynamic times such as now is not a great opportunity for online providers to be closer to their customers?

Fluctuations, perhaps rather sparse information and daily news can be disturbing. According to several studies Emotional-driven financial decisions lead to the most common investment mistakes. However, dynamic times always present new opportunities. Here are 5 tips How to keep a cool head in uncertainty and how to discover extra opportunities.

It’s in the nature of things that the daily news always provides a snapshot. Context is also important for financial decisionseg where does inflation or economic development in Switzerland compare to the rest of Europe (inflation: Switzerland 3.5%, EU-27 10.1%) or how does your fund’s performance compare to the market. Sunday newspapers with deep insights or sources like Yahoo Finance, Morningstar, Bloomberg, Reuters or the analysis reports of various financial institutions are very useful for such information.

Especially in the past few months there have been a lot of daily messages in the stock markets: the market is doing this or that and today it is doing this. Since many of us invest for the long term and are not day trading per se, it helps you to look for a longer period of time and avoid the possible herd mentality.

Illustrative example: Price development Swiss Market Index 2022 shows -20.65%. If you look at the last 5 years, the result is an increase of 10.98% and +301.9% in 27 years since 1995 (all price data as of September 30, 2022). If, like me, you have invested your Pillar 3a in securities focus Switzerland, there is still a long way to go before you can withdraw the money.

Every stock market crisis is unique. While data from the past does not help us predict the future, it is useful for classification: the biggest stock market crises of the past are the tulip crash in the Netherlands (1637), the Wall Street crash (1929), Black Monday (1987). ), the bursting of the dot.com bubble (2001-2002), the global financial crisis (2008-2009) and the COVID-19 pandemic (2020).

Forbes Advisor analyzed the biggest crashes involving the FTSE 100 and came to the following conclusions:

Stock markets are cyclical. Overall, the analysis does not reveal a 10-year period in which investors have lost money. Of course, the temptation would be to try to time the market, ie sell, wait and buy again at a particularly favorable time. In practice, however, this is hardly ever the case. Continuity, such as monthly investing and a diversified portfolio across multiple sectors, regions and asset classes, has historically outperformed in volatile times

It may sound esoteric, but positive beliefs help us curb the loss aversion bias. Several studies have shown that we experience losses as up to 2 times more painful than equal wins and the like For example, the tendency to weight negative information differently. If the stock market fluctuates strongly, this can lead to you changing your long-term strategy based on this impulse.

The remedy here is to view information in context, but also to consciously allow positive impulses.

If you want to read more about this and how our brains process information: Daniel Kahneman’s unbeatable classic on the decision-making process and behavioral economics “Thinking fast and slow” is a great book for cloudy autumn days.

Every dynamic time also has its winners. Opportunities arise for example for currencies (rising US dollar), including sectors that prove robust with slow economic growth, such as healthcare or consumer goods. The energy sector and long-term issues such as sustainable mobility, food security and green technology also offer opportunities. If you already have a robust, diversified portfolio, it can be very exciting to add additional themes or investment vehicles as satellites to take advantage of new opportunities.

How do you deal with the current uncertainty? Have you changed anything in your systems? What new possibilities do you see and what tips do you have?

Source: Blick