Overconfidence developed through a prolonged equities bull market means investors now find it “doubly difficult” to cope with negative stock market returns, according to a visiting Vanguard Investments behavioural finance researcher.
Stephen Utkus, director of Vanguard’s US Centre for Retirement Research, said investors are having “difficulty reconciling the emotional influences of investing today against their immediate needs and wants”.
“Investors become overconfident with their decisions in a bull market and then take losses personally when the market goes down.”
The solution to managing emotions, especially during turbulent times, is to “reframe investment perspectives and think long-term”, Utkus said.
“Investors need to understand that long-term investment is strategically more risk-friendly than chasing short-term profits.
“They should focus on the largest frame of reference, such as owning the market versus beating it, or focus on the total portfolio, or simply progress toward overall goals,” he said.
