The Psychology Behind Your Worst Investment Decisions

We can torpedo our portfolios without even realizing it. Avoiding these seven traps will allow you to make rational investments.

Young businessman looks stressed late at night in the office.
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When it comes to investing, we have met the enemy, and it's us. Excited by profit and terrified of loss, we let our emotions and minds trick us into making terrible investing decisions. "As humans, we're wired to act opposite to our interests," says Sunit Bhalla, a certified financial planner in Fort Collins, Colo. "We should be selling high and buying low, but our mind is telling us to buy when things are high and sell when they're going down. It's the classic fear-versus- greed fight we have in our brains."

That tug of war can hamstring our portfolios, according to a 2021 Dalbar study of investor behavior. Dalbar found that individual fund investors consistently underperformed the market over the 20 years ending Dec. 31, 2020, generating a 5.96% average annualized return compared with 7.43% for the S&P 500 and 8.29% for the Global Equity Index 100.

If investors want to stop sabotaging their portfolios, an entire field of investing psychology is ready to enlighten them about their worst impulses. You may even recognize yourself in one or more of the investing behaviors described below, along with their remedies.

Contributing Writer, -

Katherine Reynolds Lewis is an award-winning journalist, speaker and author of The Good News About Bad Behavior: Why Kids Are Less Disciplined Than Ever – And What to Do About It. Her work has appeared in The Atlantic, Fortune, Medium, Mother Jones, The New York Times, Parents, Slate, USA Today, The Washington Post and Working Mother, among others. She's been an EWA Education Reporting Fellow, Fund for Investigative Journalism fellow and Logan Nonfiction Fellow at the Carey Institute for Global Good. Residencies include the Virginia Center for the Creative Arts and Ragdale. A Harvard physics graduate, Katherine previously worked as a national correspondent for Newhouse and Bloomberg News, covering everything from financial and media policy to the White House.