Behavioral bias is something that investors all too often forget to address when managing a portfolio. When it comes to finance, biases can lead investors to act more on feelings of emotion rather than actual facts. Any indication of fear can lead an investor to do something wholly irrational.
Much of the problem stems from an investment world that is so utterly obsessed with things that happen in the short-term. The availability of data has very much exploded in the last two decades as the internet connected the world and computers have become ever more sophisticated. We are also bombarded by business media outlets and endless articles of the next economic implosion. One might wonder: “How can anyone invest for the long-term when there is so much going on in the world?”
How to Overcome Behavioral Bias
Building a long-term strategy can be a challenge but can be possible with good discipline. A good start is by taking a comprehensive look at one’s financial plan and developing a cash flow model that will help fund one’s future financial goals.
With a better understanding of cash flow demands and a target rate of return, one can then attempt to build a diversified portfolio of holdings that will give a high probability of success over the long-term. In other words, think of your required rate of return and how to get there with the least amount of risk.
Comprehensive Financial Planning, Free of Bias
If you have any questions about overcoming any behavioral biases or achieving your financial goals, contact Chatterton & Associates.