Are you becoming overly focused on market ups and downs—and feeling tempted to sell off when the markets start to drop? Loss aversion may also help explain why some people choose to stay on the sidelines and avoid investing altogether. recency bias occurs when people choose investments based on whatever the most recent top performers were. But past results aren’t an indication of future performance, and choosing investments for your portfolio this way is akin to driving while looking in your rearview mirror. sticking only with what you know could mean you aren’t achieving proper diversification. One example of the status-quo bias at work is in people’s tendencies to stick with one type of asset: According to the BlackRock Global Investor Pulse, 57% of investors surveyed believe their holdings are diversified—even though 65% of their wealth is held in cash. Another example is home-country bias, or the tendency to stick to domestic investments—thereby missing out on the growth potential that may be found in international markets. 72% of Americans don’t even think of investing in the markets as a way to save for their long-term goals—and 49% say they think negatively of investing. But if you know what your personal tendencies are, you’ll be able to clear those brain blocks better—and start making more rational, versus emotional, investing decisions. At the link below are three of the most common cognitive biases that might inadvertently be working against you.
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Investing on the Brain: 3 Psychological Biases That Can Impact How You Invest