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Why do investors do what they do?

Looking at the picture above, you might feel a ring of familiarity about your emotions if you are watching your investments on a regular basis.  This is particularly relevant when we look at what has happened in markets since the start of 2020.

Markets went up and up from 1st January 2020 until mid February.  They then started drifting down and came down with a big thump in mid March - the Covid Crisis.  Usually, markets then take time to recover slowly, like in this picture.  But in 2020 they bounced up like a 'V', rather than a 'U'.  This made investors complacent, and it was enjoyable to invest and watch your money going up and up and up in value.

Until January this year (actually some investments started falling before that, but we will keep it simple).  Then investments went down, and down (then up for a bit) then down more until we were officially in a bear market.  Investments seem to be recovering now - and remember that markets look out into the future and change before the economic and profit situation changes.  But, they may go down again (probably will!, but we don't know by how much).

So, it is important to understand how we react and why.  Behavioural finance is a whole area of study, that is interlinked with psychology, but also economics and we all feel like this.  Even us at Moneyworks - even though we have years of experience.  There were times in the middle of the Global Financial Crisis that we thought 'will this ever end', 'is it different this time'?  But markets did what they do, and they bounced back up.

With another 12 years experience under our belts, what is happening in 2022 is just a natural part of the process (even though it isn't as much fun to look at the value of investments as when they are going up steadily.)

This is the first in a series of blogs where we will be exploring the biases that we can all have when it comes to investing, things like Confirmation bias and Fear of Missing Out.  We hope that you are able to recognise some of these biases in your own approach to investing.



 

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