Stay on track The most common investor traps

Gut feelings are not the best advisors when it comes to investing.

How investors are swayed by their emotions

1. Am I missing out on a huge opportunity? – Herd instinct

A particular share price is skyrocketing. Our investor has the feeling of missing out on a trend. So he or she jumps on board - at exactly the wrong time, just before the overpriced share drops sharply.

2. Why am I always too late? –  Loss aversion

Then our investor stumbles into the next trap. The share price continues to fall. He or she courageously sits out this supposedly temporary phase. Until they run out of patience. In a panic they sell at a huge loss. Then the share price suddenly moves higher. Again the investor's timing is off.

Painful losses made the investor overly cautious. From now on, they’ll place their money in safe investments such as bonds; by doing that, though, they once again miss the recovery of the equity market. Until they follow the herd again and enter the market too late.

Now's your chance to test your loss aversion

Game 1: Guaranteed profit

Please choose:

a) You’re guaranteed to win CHF 900

b) You have the option of taking part in a game of chance with:

  • a 90% chance of winning CHF 1,000
  • a 10% chance of winning nothing

Game 2: Guaranteed loss

What would you choose?

a) You’re guaranteed to lose CHF 900

b)  You have the option of taking part in a game of chance with:

  • a 90% chance of losing CHF 1,000
  • a 10% chance of losing nothing

Did you go for the safe option (a) in Game 1 and for the risky option (b) in Game 2? Roughly 80% of the people we asked did the same. You clearly behave differently depending on whether you are in a profit or loss situation. Your behavior thus attests to a clear aversion to loss. If you are in a profit situation, you want the safe profit. If you are in a loss situation, you are relatively willing to take higher risks to prevent this loss.

To help you avoid investor traps like these and keep on succeeding with your investments, we offer analysis, strategy and discipline. Contact us now.

3. Do I only hear what I want to? – Confirmation bias

Without even realizing it, our investor only hears the news that he or she wants to hear. Seeking confirmation, not contradiction. This is especially true when it comes to investing. And it's a recipe for missing vital developments.

4. Why do I trust only what I know? – Preferring the home market

Investors prefer markets that they know. But this means they miss out on opportunities in emerging markets.

Nowhere is as safe as home. Investors tend to select what is most familiar to them. As a result, investment portfolios look very similar throughout the world: around two thirds are invested in the home market. In Switzerland, this focus is even more pronounced. The average Swiss investor invests 74% of his or her portfolio in Swiss securities. This approach still has risks, however, and has led to painful losses for many Swiss investors – for example, in early 2015 when the Swiss National Bank abandoned the minimum euro exchange rate.

Global geographic diversification of an equity portfolio can absorb such losses, since no geopolitical crisis or market event has the same impact everywhere in the world.

Global diversification is not the only argument for better performance. Spreading assets across asset classes is just as important. We offer analyses and strategies that can help you to align your portfolio optimally with your investor profile and manage it in a disciplined manner. Contact us now.

5. Why didn't I read the signs? – Hindsight bias

After the fact, it's always clear who made a mistake, or what was going to happen. Investors often think they should have predicted it all, even though this was impossible.

6. Can I judge correctly? – Anchoring

The investor must decide whether to sell a share, and takes the decision based on the cost price he or she paid for it. Thinking this is the value of the share, they’ll only sell at this price. But what does last month's share price have to do with the real value of the company? The investor is simply using a random number to make the decision.

How can I avoid investor traps?

Learn as much as you can about typical investor behavior. And most importantly, get to know your own financial personality. How much risk can you tolerate? What returns do you expect? Then review your portfolio to see if it suits your financial personality. We’d be glad to discuss it with you in a consultation.

Financial Personality Test

If you want to find the right investment strategy, it’s important to assess your risk tolerance correctly. That’s where the UBS Financial Personality Test comes in.

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