Strategies to manage investing psychology pitfalls
Biases are part of human nature. Thankfully, there are practical steps you can take to limit their impact on your investments.
The following strategies are presented for educational purposes only, to illustrate common approaches investors use to manage behavioural biases. These are not personal recommendations and may not be suitable for your individual circumstances. You should consider your own situation and seek independent advice before implementing any investment strategy.
1. Build a written investment plan
Some investors find it helpful to define their goals, risk tolerance, time horizon and rules for entering and exiting investments. Writing this down can provide a reference point during volatile times, which may help reduce emotional decision-making.
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2. Diversify across assets and markets
Diversification aims to spread risk, potentially reducing the impact of any one poor decision. This can involve investing across various asset classes, including equities, bonds, commodities, and different geographies. A balanced portfolio may help investors manage volatility without being overly exposed to one sector. However, diversification does not eliminate all investment risk or guarantee profits, and diversified portfolios can still experience losses.
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3. Use risk management tools
Stop-loss orders, limit orders and trailing stops may help some investors enforce discipline and remove emotion from trade execution. However, these tools have limitations, may not execute at desired prices in fast-moving markets, and can lock in losses during temporary downturns.
For long-term investors, automated rebalancing can help maintain target allocations even when markets experience significant fluctuations, though this approach may incur transaction costs and tax implications.
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4. Keep a trading journal
Some investors choose to document their decisions, the rationale behind them, and their emotional state at the time. Over time, this record may highlight recurring mistakes and help them recognise when biases are influencing their decisions.
5. Automate where possible
Investors struggle with emotional decision-making, they may consider using managed portfolio services such as IG Smart Portfolios. These are professionally managed and regularly rebalanced, which may help maintain discipline without daily decision-making.
However, managed portfolios still carry investment risk, incur management fees that will affect returns, and past performance does not guarantee future results. Other managed portfolio services are available from various providers.
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6. Continuously educate yourself
Understanding behavioural finance may help investors guard against its traps. IG Academy provides free courses and resources to help build investment knowledge. Educational resources are also available from various other providers and independent sources.
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