In a volatile market, the question of how to invest brings challenges. It is a decision loaded with emotions: how can we make a rational decision when our finances are at stake? Should we invest in a market that is depressed or wait until it has recovered? In this article, we explore the way our emotions can affect these decisions: a response called ‘behavioural investment’.

From the very first months of this decade, the world has experienced seismic events that have destabilised the financial markets: future uncertainty, staff absences and cross-border restrictions created volatility that prompted, for instance, a record one-day fall in the S&P 500. This was immediately followed by a rapid recovery as confidence returned to the markets only for war in Europe and global inflation to announce a return to uncertainty. 

When the unknown stands before us, it is difficult to make rational decisions, particularly when it comes to our finances. As happens with many aspects of one’s life, certain behavioural traits tend to affect the decisions that we make and this is also the case when we talk about investing. Before making further decisions in such an unpredictable market, identifying these traits might help you take better care of your portfolio. There’s a name for this: behavioural investing.

The first steps taken in the field of behavioural finance were made by Daniel Kahneman and Amos Tversky, who by making different kinds of psychological experiments discovered behavioural biases and irrational beliefs that cause us to act unexpectedly and against our own interests. Some of these behavioural traits were later studied by behavioural finance experts while analysing why people make certain financial choices and how those choices can affect markets.

What are the biases we should be avoiding?

Some of the most common biases people should consider when investing include:

It usually happens when investors are more concerned about the negative feelings regarding losses than the pleasure of market gains. This way, investors might want a higher potential return to compensate for potential losses and if there’s no certainty of this, they will avoid the investment altogether. “In an environment of higher volatility, it is important to focus on your long-term objectives and remain calm during times of market stress” recommends Geraldine Napier-Payne, Partner and Head of Central Investment at LGT Wealth Management, “it can be tempting to chase short term returns but this can lead to potentially destroying permanent value if the market quickly moves in another direction”.

A common bias amongst new investors, herd mentality argues that if a lot of people are looking into a particular investment, you tend to agree with them. Copying someone’s portfolio might not bring the best results whereas having a well-drawn plan developed with a wealth manager may bring better results.

People value money more or less based on where that money came from. Hard-earned money tends to be more valued than something that came unexpectedly, like an inheritance, a bonus or even a casino gain! People tend to accept greater risk with “easy” money. Avoid this by having a goal-based investment plan i.e., saving for a college fund or setting aside for retirement can encourage better financial decisions.

Confidence is a great ally; we just need to be aware of our knowledge and limitations. For instance, experienced investors will often invest in individual stocks (or equities) but, for the inexperienced, funds are recommended. A fund is a collective investment managed by professional Fund Managers and they offer a great introduction to understanding how the market moves and unfolds.

Anchoring refers to attaching a spending level to a certain reference, such as using the buying price as an “anchor” reference of the value of that stock or fund. An anchoring bias tends to encourage investors to take impetuous or irrational decisions, such as selling an overvalued asset, buying an undervalued one or holding onto investments that have lost value.

Napier-Payne recommends that we avoid checking our portfolio value every day to mitigate some of the anxiety we feel when markets are volatile. “If one can avoid checking their portfolio value every day it can help mitigate some of the anxiety one feels when markets are volatile. The less often one checks their portfolio there is a much greater chance the return will be positive, reducing stress and potentially poor investment decisions.”, Napier-Payne concludes.

What practical steps could we take to improve our finances?

For those of us with capital to invest, the temptation is to hold back from investing when there’s a drop in the market. However, could the opposite be true? Warren Buffett says: “Be fearful when others are greedy and be greedy only when others are fearful”. Napier-Payne supports this: “On a long-term basis, it is often the case that the best time to invest is when it feels most uncomfortable” she remarks. “Markets are now, in some cases, 15-20% cheaper. Although it may not be the absolute bottom, it certainly is a better time to invest today than it was only a few months ago. We encourage our clients to focus on the underlying fundamentals of their portfolio, if the underlying business remains strong it will be able to withstand short-term volatility”.

The practice of investing small amounts of money regularly, called phasing investment, is a way of making the best out of the changing market. According to an analysis undertaken by Barclays, an investor phasing their investment in 2020 into six equally sized trades at the start of the month, from January to June, would have experienced a return of 34% to 31 March 2021, compared with 22% for the day one investor.

For those who remain unconvinced, opening an account with a wealth manager and preparing to invest is a great first step to take. With an account open, investors are ready to act swiftly once they are sufficiently confident that the market is in recovery. The process of selecting a wealth manager and opening an account can take several weeks by which time gains may have been lost.

Overall, we recommend that investors speak with our panel of wealth management professionals and ensure they are comfortable with their investment decisions.

Behavioural investing: how our emotions affect decision making 

Partner & Head of Central Investment

Geraldine Napier-Payne

Since LGT Wealth Management launched in 2008, the plan has been simple: put their clients first and provide a personalised, transparent investment service, designed around their goals and needs. 

LGT Wealth Management is part of LGT Group, which is owned by the Princeley Family of Lichtenstein. Their owner's entrepreneurial flair and financial strength mean they regularly invest in the business to ensure the best outcomes for clients. 

LGT's comprehensive wealth planning services caters to individuals, companies, partners and trustees. With bespoke financial plans tailored to your needs, they ensure your long-term ambitions remain on track. 

From pension accumulation to inheritance tax planning, their unbiased advice encompasses a wide range of services, guiding you towards a secure financial future. They regularly review and adapt your plan to keep you on track to achieve your objectives. Rest assured, LGT's focus remains solely on your success, with no in-house products to influence their impartial recommendation.

LGT know that wealth is personal, which is why they work with you to achieve your financial ambitions. They take pride in offering bespoke solutions and services, each meticulously crafted to cater to your individual financial aspirations. 

Your dedicated investment manager will embark on a collaborative journey, working closely with you to devise tailor-made investment strategies that meet with your unique goals.

LGT Wealth Management

Lucy joined LGT Wealth Management in 2010 and manages the wealth of private clients including entrepreneurs and international clients. Lucy previously worked at Barclays Wealth and the National Bank of New Zealand (now ANZ) Private Bank and holds BCom (Economics), BSc (Psychology), Certified PostGrad Dip PFP, IAD, PCIAM and CFA's Certificate in ESG Investing. Lucy sits on the LGT Charity Committee, the Tier 1 Committee and is a Chartered Fellow of the CISI.

Partner, Wealth Manager

Andrew Cheater joined LGT’s Bristol office in 2018 and advises entrepreneurial clients, families, trusts and charities on the management of their wealth. With over 22 years of experience, Andrew’s previous roles include Director at Coutts, where he also headed up the South West team for a number of years, and Client Director at Bank of Scotland. Andrew holds a BSc (Hons) in Business Management from the University of Plymouth and the diploma in Private Client Investment Advice and Management. He is a member of the Chartered Institute of Securities and Investment.

Wealth Manager

Lucy is an Investment Manager specialising in bespoke discretionary portfolios for HNW and UHNW entrepreneurs, professionals and families. Lucy works closely with Andrew Palmer, a Partner at the firm, and together they look after around eighty families and manage £500m of assets. All of Lucy and Andrew’s clients have access to LGT’s exceptional Wealth Planning team to ensure that clients are appropriately structured for their needs and to achieve their financial objectives. Lucy has twelve years' experience in wealth management and is a Member of the Chartered Institute for Securities and Investments. She holds the Private Client Investment Advice and Management certificate and is a Chartered Wealth Manager. Prior to joining LGT in 2018, Lucy was an Investment Manager at Cazenove Capital where she managed portfolios for complex and UHNW families. Lucy completed her qualifications at C. Hoare & Co. where she worked in the Wealth Management department looking after private clients and charities.

Investment Manager

Andrew works as part of a team managing assets for UK and international high net worth and ultra-high net worth families. Andrew has had an 23 year career in financial services, having previously held senior positions at Old Mutual and Barclays Bank. Andrew also holds an MSc in Organisational Psychology and is a Fellow of the Securities Institute.

Geraldine Napier-Payne

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Behavioural investing: how our emotions affect decision making

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Geraldine Napier-Payne

Bio

Articles from author

Behavioural investing: how our emotions affect decision making

Start your journey to your Financial well-being

FIND OUT MORE

LEGAL

CONTACT US

Start your journey to your
Financial well-being