Investors warned of heartbreak from emotional investing

Investors have been warned that emotional investing costs around three per cent in lost returns a year.

Stock markets dipped in March year at the start of the coronavirus outbreak and peer-to-peer lenders also suffered from a rise in withdrawal requests as investors panicked.

But behavioural finance experts Oxford Risk have warned that responding emotionally to the markets will harm returns.

Greg Davies, head of behavioural finance at Oxford Risk, said the current economic, fiscal and stock market environment, combined with the recent rise in crypto-assets valuations and retail trading, has created a situation where the risk of emotional investing has hit a new peak.

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He said emotional investing involves people acting on their behavioural impulses and emotionally buying and selling stocks and investments on the back of markets rising and falling.

This often leads to people piling into investments when markets, stocks or asset classes are high, and selling when they are low.

“We currently have the perfect ‘storm’ for emotional investing,” Davies said.

“Following the coronavirus crash in the first quarter of last year when stock markets saw big falls, we are now in a bull market, with markets around the world rising.

“Optimism is higher because of hopes around the vaccine roll-out and economic and fiscal stimulus programmes.

“However, there are huge economic problems ahead around unemployment and huge public spending deficits for example, so we should expect the unexpected in the markets over the coming months.”

He also warned against an emotional reluctance to invest.

For those investors who have increased their allocation to cash during these volatile times for markets, Oxford Risk estimates that the cost of this “reluctance to invest” is around four to five per cent over the long-term.

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