Check out the mistakes that must be avoided if you want to earn money

No matter how smart or well educated you are, and no matter how successful professionally, when it comes to investing, you still might not make the best decisions.

That’s because you’re human, which means you’re hardwired to respond in certain ways that serve you well at many points in your life but tend to work against you when it comes to making smart investment decisions, according to psychologist Daniel Crosby. , author of “The Behavioral Investor”.

“High intelligence not only is not an isolation [contra más decisões financeiras]as well as being a red flag,” Crosby said.

But here’s the thing: if you’re aware of your weakness when it comes to the markets, it can really help you to be a better investor.

Based on decades of cutting-edge behavioral research, Crosby said investors easily fall victim to four profiles. But when you are aware of them, you can take steps to avoid their effects or leverage them to your financial advantage.

1. Ego

Everyone has an ego. It protects us in many ways, in part by creating a sense of confidence – and often overconfidence – in our own abilities and judgments.

“Ego gets us out of bed in the morning,” said Crosby.

Those who become very self-assured are more likely to be resilient and find professional success. “Overconfident people are generally happier and more likely to be successful businesspeople and politicians. AND [um forte] ego can protect us against setbacks, disappointments and losses,” he said.

But when it comes to investing, too much self-confidence can cost you a lot of money.

For example, Crosby said, most of us would rather find information that confirms what we already believe than seek information that challenges our beliefs.

He cited research showing that even in the face of facts that directly contradict what we believe, thanks to our ego, we can become even more entrenched in these erroneous beliefs.

One way this happens when you’re investing is that you can be confident that a certain company or new asset class – like crypto – will win the future. So you throw a disproportionately large amount of money at your idea that you can’t afford to lose.

But research suggests that picking what you believe are future winners over investing in the broader market can hurt your long-term returns.

Crosby cited statistics showing how active equity fund management underperformed passive indexing more than 80% of the time over five- and 10-year periods. And that’s not counting the higher fees an investor pays for actively managed funds.

2. Conservative

Investing always involves risk. But people’s desire to cling to the familiar or take the adage “invest in what you know” too far can actually increase that risk.

Crosby used the example of someone who works in the tech industry, buys a house in a tech hub like San Francisco, and invests primarily in tech stocks.

The bottom line: Your financial prospects will disproportionately depend on the health of the tech industry because you’re devoting most of your time and money to it through your work, your ownership, and your portfolio. When the tech industry takes a hit, it can take a hit financially.

Another way that investors often fall into the familiar pattern is to invest primarily in US stocks, believing that non-US stocks are too risky.

3. Attention

Humans tend to pay disproportionate attention to bad news or dramatic, low-probability events (eg, shark attacks or planes flying into buildings). Both can distort our perception of risk.

In addition, information overload — whether from data, research or news — can lead to poor decisions because too much information makes it difficult to see the forest for the trees, Crosby noted.

4. Emotional bias

Our emotions and intuition can protect us in some difficult situations or they can help guide us. For example, you might finally choose a good partner after years of dating other people who were never right for you.

But they can also cause us to act rashly in the moment and overrule what we normally know we should do.

Think donuts, suggested Crosby. You may have been given all the nutrition advice in the world, but at the peak of stress you’ll invariably eat the donuts, not the asparagus.

The way emotions play out in the markets can be costly. If your fear is activated, you may panic and sell at the wrong time. Or, if you’re enthusiastic, your optimism can distort your sense of how much risk you’re really taking on an investment.

Strategies to combat our prejudices

Investors can try to overcome their inherent biases in a number of ways, Crosby said. Among their suggested strategies:

Tune in the noise. Don’t check your investment accounts daily. Don’t fixate on every turn of the market. Don’t drown in metrics. And don’t let negative events disproportionately drive your investment decisions.

Have humility. You cannot predict the future. And you’ll never have perfect information to place a sure bet on a single stock or sector.

Diversify your holdings. Crosby put it this way in his book: “Diversification is […] the embodiment of ego risk management. [É] a concrete nod to the luck and uncertainty inherent in money management, and an admission that the future is unknowable.”

For example, to combat the so-called domestic bias in your investments, Crosby suggested that you shouldn’t invest much more in domestic stocks than your share of the world market.

Depending on how they are measured, US equities make up anywhere from 45% to 60% of the global stock market. But average US investors typically have a much larger share of their equity holdings in US companies and very little in foreign stocks.

Put a system in place. Automating your savings and investing in a diversified portfolio, regardless of market conditions, often works well. The same goes for automatically saving a certain amount of savings for short-term goals and emergencies.

“It’s less about the perfect process and more about having a process,” Crosby said.

One example is the idea of ​​“set it and forget it” with retirement savings. Employees who choose the option in their plan to automatically increase their savings whenever they receive a raise do better than if they had to make decisions every month about how much to save.

Use emotions to your financial advantage: a study cited by Crosby showed that low-income parents were likely to save twice as much when they had a savings envelope with a picture of their children.

Realize that no investment is perfect. Many people get their exposure to the stock market, specifically through target date funds that their employers offer as a standard investment.

While target date funds have their critics, Crosby said, “Every investment is imperfect. […] AND [os fundos na data-alvo] are much better for the average person than what the average person is doing.”