7 Behavioral Biases Mutual Fund Investors Must Avoid

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Mutual Fund Education

7 Behavioral Biases Mutual Fund Investors Must Avoid

Aaron Levitt Jan 27, 2015

While overcoming your own thoughts can be a difficult proposition—even experts behavioral finance still fall victim to these things—knowing what pitfalls abound is a major step in combating the problem. Here at MutualFunds.com, we’ve prepared a look at the seven biggest behavioral biases and how they affect your portfolio choices.

Be sure to also see the 25 Tips Every Mutual Fund Investor Should Know.

1. Recency Bias

When we invest, we need to remember that what happened yesterday or last week may or may not be part of the long-term trend.

2. Choice Paralysis

Overcoming choice paralysis is relatively easy. You need to not be intimidated by all your choice. Use tools like screeners, read the various fund literature, and invest.

See our list of the Best 25 Online Tools for Mutual Fund Investors.

3. Herding

Herding is precisely why value investing works for some investors. By not following what the market is doing and by buying the opposite, investors are able to profit when the tide shifts. It can be difficult to do, but it will ultimately be worth it.

4. Loss Aversion

The easiest way to overcome loss aversion is to stay focused on your goals, timeline and analysis. The longer your timeline, the easier it is overcome your fear of loss.

5. Confirmation Bias

See also the 7 Biggest Mistakes to Avoid When Investing in Mutual Funds.

Overcoming confirmation is as simple as reading, watching and understanding all the data available, while making sure that there is at least one source that can be a “dissenting voice of reason.” You need a contrary viewpoint to be successful.

6. Optimism and Overconfidence

It’s OK to be happy with your portfolio’s recent performance, but you need to remember that any future investment picks need to be fully analyzed before you pull the trigger. You’re not perfect and you do and can make poor decisions.

7. Bias Blind-Spot

The Bottom Line

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