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Understanding your financial situation can be difficult. With just a few questions you can calculate your current financial position and identify your top priorities. Research shows that people who have documented financial goals and work with a financial professional are:
- Confident in achieving financial goals and handling unexpected changes.
- More likely to feel on track with financial affairs.
- Successful at sticking to financial strategies.
- More likely to have higher levels of emotional, financial and overall contentment.
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One of the areas that Mateo specializes in is financial behavioral biases. Having someone to help you manage and control your biases through all the market noise is key to a successful investment strategy.
What is behavioral finance?
According to the Corporate Finance Institute, behavioral finance is the study of the influence of psychology on the behavior of investors or financial analysts. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases.
One of the most important behavioral biases that we need to try and manage is loss aversion.
Loss aversion happens when the fear of losses leads to a focus on avoiding losses more than making gains. Let me give an example: if you started with an account balance of $100,000 and the next day you made $1,000 you would feel content. If you ended up losing the $1,000 though you would feel discomfort. Loss aversion is the theory that most investors experience the pain or discomfort of losing twice as intensely as the enjoyment of the same level of gain.
This is an important concept because it often affects our investment strategy. The feeling evoked by losing money is never easy to handle but we tend to let our emotions get the best of us and we are tempted to act irrationally during financial volatility as we try to avoid experiencing twice the pain. Having a solid investment strategy is key so that we do not let this behavioral bias interfere with our wealth strategy.
Contact Mateo to find out how to manage your behavioral biases within your portfolio.