This week’s chart highlights the psychology of investing, and how our emotions can drive decisions far more than we’d like to admit.

Growing up, my mother was a psychologist, so our house was full of books about how people think, feel and behave. It was impossible not to be curious. I remember leafing through those books and being fascinated by how emotion can shape decisions and often in ways we’re completely unaware of.

Fast-forward to today, and the same applies to investing.

Analysis by US research firm Dalbar shows that over the last 30 years, the average investor has underperformed the market by more than 3% per year, largely due to emotional decision-making, buying high and selling low. Nobel laurate Daniel Kahneman and fellow psychologist Amos Tversky demonstrated that losses hurt roughly twice as much as gains feel good, a concept known as loss aversion.

It’s why, when markets sell off like they did last week, fear often outweighs logic. Our chart shows the emotional cycle for investors, which tends to follow a path of optimism, euphoria, anxiety, fear, panic, despondency and only later, hope and recovery.

The irony is that the most attractive opportunities often appear when confidence is at its lowest.

That’s why at Marlborough we’ve developed a data-led decision-making process. We recognise that emotion is part of being human, but our structured process helps ensure decisions are driven by research, not reaction. Every trade and allocation shift goes through rigorous debate and is backed by data, not gut feeling.

Key Takeaway

Emotions can’t be removed from investing, but they can be managed with process, perspective and patience.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.