Are you your own worst enemy?

Your emotions could be the biggest barrier to achieving your investment goals.

Confronted by a fearsome, snarling sabre-toothed tiger, our Stone Age ancestors had the right idea. They ran away. Those ‘fight or flight’ instincts kept them alive. But fast-forward hundreds of thousands of years and those in-built reactions can lead us to make some poor financial decisions. That’s particularly so when it comes to how we respond to the inevitable ups and downs of stock markets.

Evolution has programmed our brains, and it partly explains why we feel the way we do about money. But we’re not robots. Investing is an emotional process. Making better financial decisions isn’t about taking the emotions out of investing. It’s about understanding our emotional responses and learning how to manage them.

Legendary investor Benjamin Graham summed it up well: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Graham argued that investors’ biggest challenges are their own emotions, behaviours and psychological biases. He maintained that failure to achieve their long-term investment goals is often down to irrational or impulsive investment decisions driven by things like fear, greed, overconfidence or impatience.

So, what common mistakes do investors make and how can you avoid them?

1. Reacting to short-term noise

How often do you check your phone, just in case you’ve missed something? Probably too often. If you do the same with your portfolio valuation, you could be asking for trouble.

On any one day, there’s a good chance one or more investments in your portfolio are flashing red, tempting you to do something about it. Stock markets do go down as well as up and we’re bombarded with news that tends to make headlines of the bad days and ignore the good ones.

If you react to the daily fluctuations, you could be putting your long-term investment goals at risk. History shows that the biggest gains in markets often follow the sharpest falls, so just sit tight or you risk missing out on the recovery.

Although our brains are hard-wired to react to what’s right in front of us, it’s best to tune out to the short-term noise. You’re investing for the long term, not tomorrow. Checking your valuation once or twice a year will allow you to sleep more easily and reduce the risk of making knee-jerk reactions.

2. Playing it too safe

Short-term losses are a fact of life when it comes to investing. But if the fear of loss dominates your investment decisions, then you’re unlikely to achieve the best results.

Cash is unquestionably the right home for money you might or will need in the short term. But loss aversion might mean that you don’t invest enough for the long term, playing it safe by leaving too much of your money in cash, idling on the sidelines. Or it could mean you’re far more likely to bail out when you see markets falling.

Our caveman ancestors knew when to run away, but they also knew that if they wanted to eat, they had to hunt, and that was dangerous. They had to take a risk to earn that reward. Investors also need to find the right balance between their long-term goals and the level of risk they’re prepared to take.

3. Being over-confident

If you are five years from retirement, you don’t want a stock market crash to derail your plans. However, switching all your savings into low-risk cash holdings will simply mean your retirement funds are unlikely to keep pace with inflation.

Most people want to steer a path between these two extremes, which means holding a diversified mix of assets, including equities, bonds, and cash. Think about your own circumstances and how your future plans could impact your investment strategy.