How emotions can affect your investment decisions

Clare interviewed Dr. Peter Brooks, Barclays’ Head of Behavioural Finance’ on how our emotions can affect our investment decisions.

The value of investments can fall as well as rise; you may not get back what you invest. If you’re not sure about investing, seek independent advice.

Clare: Joining me on Smart Investor to chat about how your emotions can infect your investment decisions is Barclays Head of Behavioural Finance Peter Brooks. Thanks for joining us, Peter. Behavioural finance - totally fascinating but something I think a lot of people probably haven't heard of. What is it? And how does it affect our investment decisions?

Peter: Behavioural finance is this melding of two almost disparate disciplines. One, finance theory - how to build a good portfolio for the long term. And how our emotions will affect how we react to that on a day-to-day basis. So actually when you think about how it affects us the same way as all our decisions. Sometimes we like to make a bit of space and relax and make our best decisions when we've removed ourselves into a quiet place. Investing can be very similar. If you remove yourselves from some of the stimulus of that investing decision stress, you can make a better decision.

Clare: So what are some of the common mistakes people make?

Peter: Probably the easiest example to think about is touching on fear and greed. So as markets go up and down people's emotions tend to change. As markets go up people get excited and making money is easy when markets are rallying. When markets are falling, panic and fear can set in. And that creates a sort of behaviour in people that is almost the complete opposite of a good investment strategy. You should be looking to buy towards the bottom of the markets and hold for the long term. But actually what that psychology makes us do is get excited at the top of the markets and want to buy then and get fearful at the bottom of the markets and want to sell. So we're wired almost completely the opposite of what a good investor would be.

Clare: So have you got three tips, quickly as to what people can do to change their behaviour?

Peter: Absolutely, so the three tips I would go with all the time. Think about being diversified so the risk of any individual position really doesn't affect you too much. Look for your bigger picture, understand what you're investing for because it's often a very long-term goal that you're looking for. And equally, look a little bit less often. If you look less often, you'll see less risk.

Clare: Brilliant. Thank you, Peter. As always, if you'd like more information about how to become a better investor, check out our website. Until then, we'll see you next time.

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