Emotions that influence our investment decisions – and how to tame them

Mark Churchill 26 June 2016

Look back at the beginning of 2016. There is no denying it: for stock market investors, it was a bracing start to the new year. Here's how four major share indexes fared in the first six weeks…

During times like this, it’s easy for ordinary investors to get caught up in negative sentiment and change course.

But if we're following all the sensible guidance and investing on a long-term basis, market dips can be your friend, not your foe. It's important to stick to a sustainable investment strategy, continue to look for good value investments and put ourselves in the best position to capitalise when markets do well or recover.

Having said that: human nature dictates that there is a behavioural bias in everything we do.

And being aware of these biases is the first step to keeping emotional decisions – ones you might later regret – in check.

In particular, watch out for these four emotional drivers that tend to influence ordinary investors’ decisions in a time like the present – and consider the ways that you can master them.


Fear is probably the most dominant emotion in investing. The fear of losing money can override logic and lead to missing out on good value investment opportunities that could help you to be better positioned for the long term.

The tendency:
Pulling out of a bear market and panic selling are key characteristics of an investor consumed by fear.

How to tame it:
If you have taken the wise step of writing down your investment goals and your strategy to reach them, now is a good time to take another look at your plan and remind yourself of those principles. Providing you have enough time before you need to sell your investments, you could begin to counterintuitively recognise the onset of fear as a buying signal.


Considered the deadly sin of investing, greed – the opposite of fear – is often the most powerful motivator, and frequently takes hold when markets have been on a good run.

The tendency:
Investors motivated by greed are attracted to quick and high returns and therefore unable to take a long-term view. As such they often defeat themselves by buying investments that have already risen sharply and become overvalued. When these holdings experience the inevitable price correction, it can take years to recover wealth lost in the process.

How to tame it:
As with overcoming fear, the key is to recognise when greed is becoming a driver and train yourself to head in the opposite direction. The challenge is to follow the maxim of renowned investor Warren Buffett:

“You want to be greedy when others are fearful. You want to be fearful when others are greedy. It's that simple”.


Two optimistic young guys

Overconfidence stems from overestimating your own ability or expertise, perhaps after some early successes.

The tendency:
Overconfident investors tend to believe that they have a natural ability to identify a winning investment. You may be tempted to put too much focus on one asset class and overlook broader factors influencing your investments, which can result in an unbalanced investment strategy.

How to tame it:
While it is good to grow in confidence up to a point, remember that not even investors with a long-term track record get it right all of the time: just call to mind hedge fund billionaire John Paulson losing a small fortune buying gold near its peak, or Warren Buffett's recent losses on his shareholding in Tesco.

The key is to approach each new investment with the same humility you did the first.

Herd mentality

Sometimes we are happier following the crowd instead of making investing decisions we've thought through for ourselves. Peer pressure and the influence of a large group of people creates fear of regret or missing out.

The tendency:
A herd mentality is a psychological stumbling block for investors because it creates a ready excuse for bad decisions – “others were doing it too”. At best, following the crowd results in mediocre returns – ‘copycat’ decisions are unlikely to uncover the real opportunities in markets.

How to tame it:
Take a step back. Which investments are being ignored by the crowd? Some of the best long-term track records belong to those with a contrarian approach – investors who look for assets that are attractively priced for no reason other than being out of favour with the mass market.

Can you control your emotions as an investor?

Your challenge, should you choose to accept it, is to eliminate mistakes caused by emotions that sway investment decisions, and be the level-headed investor who wins out in the end!

Of course, that's easier said than done. If there was no emotion involved in securing your long-term financial wellness, it would be difficult to maintain your interest in investing.

The multi-asset approach…

One way you can ensure that strategy, not emotion, drives your investments is to delegate the day-to-day portfolio-building decisions to a trusted fund manager. This is one reason behind the popularity of multi-asset funds. These funds invest in a blend of different asset types in an attempt to spread risk and offer ready-made diversification to investors. Some examples of multi-asset funds are the Jupiter Merlin series, Episode Income from M&G Investments, and the Momentum Factor Series funds. They are designed to look through the short term noise and deliver a return that aligns with the needs of investors over the long run.

To find out more about different approaches to building your investment portfolio, including whether multi-asset or multi-manager funds would suit your approach to investing, read our DIY investing options guide

The self-directed approach…

For investors comfortable keeping these four emotional biases in check, it can be rewarding to manage your own investment portolio on a low-cost investing platform. We've built a comparison tool to help you find the platform with the lowest costs and best features for your own style of investing.