Behavioural Finance: How to Stop Your Emotions Costing You Money

Traditional finance assumes investors make rational decisions. Real people don't. Fear, overconfidence and the urge to follow the crowd lead many of us to buy high, sell low and abandon sound plans at the worst possible moment. Behavioural finance studies these patterns, and understanding them is one of the most practical ways to improve your long-term results.

Five biases to watch for

1. Overconfidence. Believing we know more than the market leads to frequent trading and concentrated bets. Trading more often tends to raise costs and rarely improves returns.

2. Anchoring. We fixate on a reference point, usually the price we paid. If you bought a share at R50 and it falls to R30, the question is not "when will it get back to R50?" but "is this still the right investment today?"

3. Herding. Following the crowd feels safe, but it is how bubbles form. The hot tip on a WhatsApp group is often the last stop before a fall.

4. Loss aversion. Losses tend to hurt more than equivalent gains feel good. That can make us cling to poor investments to avoid admitting a loss, or sell good ones in a panic.

5. Recency bias. We assume whatever happened recently will continue. After a sharp fall, investors expect more falls; after a strong run, they expect it to last forever.

Habits that keep emotions in check

• Write down your plan. Your goals, time horizon and target mix of investments give you something to return to when markets are noisy.

• Automate your contributions. A monthly debit order removes the temptation to time the market.

• Review on a schedule, not on headlines. A set review once or twice a year is enough for most long-term investors.

• Rebalance with discipline. Bringing your portfolio back to its target mix means trimming what has done well and adding to what hasn't, the opposite of what emotions tell us.

• Pause before acting. When you feel an urgent need to buy or sell, wait a few days. The urge usually passes.

For Muslim investors, the principle of sabr (patience) is a powerful companion to a good investment plan. Long-term wealth is usually built by staying the course, not by reacting to every movement.

A second pair of eyes

One of the most valuable things an adviser brings is objectivity when emotions are running high. Sapphire Global can help you build a plan you can stick to. Get in touch to book a review.

Sapphire Global Financial Services is an authorised financial services provider (FSP 51022). This article is general information only and does not constitute financial advice. Please speak to a qualified financial adviser about your personal circumstances.