❤️‍🔥 The heart truths about investing

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🌀 Analysis paralysis

What is this? This is your classic “overthinking” situation. Analysis paralysis happens when you consume too much investment information from different sources – like news, data, advice from friends or even Thrive – and you end up overwhelmed. As a result, you are unable to make a final decision about what to invest in.

Why is this a problem? When you end up freezing in your decision-making process due to an overload of information, such inaction can often lead to missed opportunities. 

Let’s say you’ve been interested in investing in Apple stock since late last year, when the price hit a 52-week low in December. However, with all the recent tech market turmoil, and different opinions from your friends and the media, you still haven’t made that call to buy the stock. Well, then you may have just missed out on the 25 per cent leap in Apple’s stock price since then.

Of course, hindsight is always 20/20. But sometimes a lot of this anxiety we put ourselves through – to the point where we end up frozen by indecision – is unnecessary.

“Nobody has a crystal ball, so you probably don’t want to spend too much time guessing the markets in the short-term,” says Tan Chin Yu, advisory lead at wealth advisory Providend.

“More analysis (about one’s potential investments) does not always lead to a better outcome,” he points out. “In fact, it can be exhausting, take up more of your time and add to more unneeded procrastination on your end.”

How can it be avoided? 

• Be more specific when doing your research on what to invest in. Instead of relying on generic questions like “How can I make a profit from this?”, ask yourself: 
• Focus on good, not perfect. Good, when investing, is enough to get you started on your journey. 
• Give yourself a firm deadline to make a decision on what to invest in and stick to it. 

“That being said, you don’t want to invest without doing any due diligence at all,” Tan clarifies. “It’s still important to do some basic research.”

🚢 Sunk cost fallacy

What is this? It’s the act of sticking to an investment (instead of selling it at a loss) due to all the time and money already invested in it.

Why is this a problem? You might think you are protecting your investments but in reality, you could be furthering certain losses you already have when you should be cutting them.  

For example, let’s say you bought Stock A back  in January 2022 when it’s been on an uptrend. Following news of Company A’s poor corporate governance and string of scandals, the price of Stock A slipped to US$19 when you checked your app again late last year. In a moment of defeat, you decided to just leave your investment (although you could have cashed out – yes, even that US$19!). Today, it has slipped further to US$14.54.

“The sunk cost trap is probably the biggest (and most common) issue that we see our clients face, and can be a real bias that leads to truly poor investments,” says Tan. “In the past, we’ve encountered clients that have bought a structured product that went down by 30 per cent, and yet they cannot bear to sell it.” 

“While on a whole, markets do recover, this might not apply to all markets,” he adds. 

How can it be avoided? 

• Imagine if the investments you are currently holding are in cash instead: Would you still buy back those investments, or use that money for other possible spending? Such a mental exercise can help investors avoid the sunk cost trap and continue to see value in cashing out losing investments. 
• Set a threshold for the amount of volatility you can stomach when investing and be prepared to cut your losses when you have reached that limit. Having a concrete number or percentage helps take out the emotional aspect to investing.

😅 Overconfidence

What is this? Ever been overconfident with certain investments? This issue occurs when investors act like there is no uncertainty in the market, and believe that past wins equate to future successes. 

Why is this a problem? “You never want to jump into investments without really understanding why you’re investing and what exactly you are investing in,” says Tan. “Just because something was really exciting two years ago doesn’t guarantee that it will have the exact same prospects down the road.”

Tan gives the example of the past hype around tech stocks and cryptocurrencies. When the prices for these types of assets rose spectacularly just two years ago, everyone was clamouring to invest even more. When prices rose, they attributed the windfall to their investment ability. So when the crypto winter hit, investors could not believe it and held on, thinking that they would eventually recoup their losses even with the collapses of various crypto exchanges that caused some investors to lose everything.

“We’ve learnt to manage the expectations of our clients, especially if they have a lot of money in this investment, and bring them back to earth on these issues,” he adds. 

To some degree, overconfidence is at the opposite spectrum of analysis paralysis – a kind of “utopia myopia”. 

How can it be avoided?

• Refrain from blindly jumping into certain investments simply because they’ve jumped in value in the recent few months or years. Past performance does not guarantee future results. 
• Understand where the returns are in the investments you are making.
• Learn to manage your expectations in your investment journey.  
• Remember that there’s always lots to learn in your investing journey and keep in mind that you may not always be the expert just because something worked in your favour previously

TL;DR: 

• Inaction is a form of action too – and this could hurt your investment journey 
• Striving for perfection in investing can work against you 😤
• Holding onto losing investments can prevent you from cutting your losses 😢
• Always be measured in your expectations when you are investing