Could Behavioural Mistakes Be Undermining Your Investment Success?

Markets are inherently unpredictable, yet many of the most damaging investment outcomes stem from predictable human behaviour. Emotional responses to uncertainty, fear, and short-term noise can lead investors away from well-structured plans.

Recognising behavioural risks is a key part of sound financial planning. That’s why we’re highlighting three of the most common and damaging behaviours: recency bias, loss aversion, and herd behaviour.

Mistake 1: Recency Bias - Overweighting What Just Happened

Recency bias occurs when investors place too much importance on recent events while underestimating longer-term trends.

After a period of strong market performance, investors may assume those returns will continue and increase risk at precisely the wrong time. Conversely, following market declines, they may become overly cautious, reducing exposure just as valuations become more attractive.

This behaviour can undermine investment success by:

• Encouraging buying after markets have already risen
• Prompting selling during periods of short-term volatility
• Distracting investors from long-term objectives

The solution: Adopt a disciplined investment strategy that looks beyond recent headlines and focuses on long-term fundamentals rather than short-term performance.

 

Mistake 2: Loss Aversion - The Fear Of Losing Money

Loss aversion refers to the tendency to feel losses more strongly than gains of an equivalent size. In practice, this often leads investors to prioritise avoiding losses over achieving reasonable long-term returns.

While this reaction is human, it can be costly. Investors influenced by loss aversion may hold excessive cash, avoid necessary risk, or sell investments prematurely to avoid further losses.

Over time, this can result in:

• Missing out on market recoveries
• Accepting lower long-term returns than required
• Eroding purchasing power due to inflation

The solution: Aim to balance risk and return in line with long-term goals, rather than allowing short-term discomfort to dictate decisions.

 

Mistake 3: Herd Mentality - Following The Crowd

Herd mentality occurs when investors follow the actions of others rather than making decisions based on their own objectives and strategy. As humans, we are hard-wired to follow the herd to survive, and evolution has not succeeded in eliminating the tendency to conform. However, following the herd is a terrible investment strategy!

This behaviour is often driven by fear of missing out during rising markets and fear of being left behind during downturns. Media coverage, social commentary, and peer conversations can amplify these pressures.

Herd behaviour can undermine investment success by:

• Encouraging entry into popular investments at inflated prices
• Increasing exposure to concentrated risks
• Undermining diversification and long-term planning

Investment decisions driven by collective emotion rarely align with disciplined, long-term strategies.  

The solution: Dollar cost averaging, staying invested through market cycles, and maintaining proper diversification help reduce emotional decision-making and manage risk more effectively over time.

Awareness alone is rarely enough to prevent costly behavioural mistakes. This is where a well-structured financial plan plays a vital role, providing both direction and discipline.

Working with a financial adviser can further strengthen this process, helping investors make more considered decisions and stay aligned with their long-term objectives.

A clear investment framework, built around personal goals, time horizons, and risk tolerance, reduces the influence of emotion during periods of market volatility. Regular reviews and portfolio rebalancing reinforce discipline, offering perspective and reassurance when markets are unsettled.

A Hoxton Wealth adviser can work alongside you to define meaningful objectives, construct a diversified portfolio suited to your circumstances, and provide ongoing guidance. This steady support helps investors navigate market ups and downs with greater consistency and confidence.

Professional financial planning also serves as a behavioural anchor, keeping attention focused on long-term outcomes rather than short-term market noise.

If you’d like support to overcome these natural human behavioural tendencies that could be undermining your investment success, why not get in touch?