What You Know About Investing Can Hurt You More Than What You Don’t Know

Ever heard the old Wall Street adage “bulls make money, bears make money, pigs get slaughtered?”

You might think it’s just a warning about being too greedy while playing the market.

But it also points to the complex role that psychology plays in investing.

Smart investors crunch a lot of numbers. They dig into a company’s background. They examine quarterly reports and listen to analyst calls. Investing is an exercise in objectivity.

But emotions can also play a HUGE role in making investment decisions. Even experienced investors sometimes struggle with managing them.

There are many types of behavioral biases in investing. One of the most common is confirmation bias. It’s a tendency to seek out the information that supports your beliefs. It also tricks you to ignore any information that goes against your beliefs.

In other words, confirmation bias allows you to shield yourself from opinions that don’t match up with yours … usually without even realizing it. To other people, confirmation bias can look like overconfidence or even arrogance.

So, how can you avoid the pitfalls of confirmation bias?

First, realize it’s much easier said than done. Your brain can get quite good at tricking you.

The best way to overcome confirmation bias is to view your investment decisions through different lenses. Try playing devil’s advocate with yourself. Run through a list of pros and cons about your investment strategy. Then, try to change your own mind.

Getting others involved may help, too. Talk with your spouse or a trusted friend, and have them poke holes in your stance. The catch is that you MUST truly consider their feedback — not just nod your head and do your own thing.

Seeking advice from a neutral third party, like a trusted financial advisor, can also be useful.

Ready to attack your behavioral biases? Give the MDL Financial Group team a call! We can help you come up with a plan that makes sense for you and your goals. We also promise to tell you what you need to hear … not just what you WANT to hear.