Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
No one likes making mistakes, especially when it comes to investing. That’s why it’s important to have an investment strategy which is based on a series of questions. Like, what are your financial goals? How long do you want to invest for? What are your personal and financial circumstances? How comfortable do you feel about risk?
But that’s not all you need to ask yourself. These are simply the easy-to-get-your-head-around known pieces of information that you need to be aware of to make investment decisions that are right for you. But what about the unknown built-in biases that shape our decisions?
This is where a little science can help. Behavioural scientists have long identified a range of investing biases - from confirmation bias to status quo bias, herd bias, representative bias and more. I’ve whittled the list down to three that I feel have the potential to cost you money. And then, because forewarned is forearmed, there are some practical steps you can take to lessen their impact on your investments.
1. We fear losses more than we like gains
This fear - otherwise known as loss aversion - really speaks to me. Over the years there have been times when the value of my investments has significantly dropped and I’ve felt quite ill at the thought. Equally, there have been times when the value of my portfolio has been significantly up.
And while these gains have put a little spring in my step, I’ve not been deliriously happy. My reaction to losses is simply not equal to my reaction to gains. And it’s an aversion that often convinces people to save, rather than invest, even when inflation erodes the value of their savings over time (a bird in the hand is worth two in the bush and all that).
The fear of loss can hold us back in so many ways, from finding a new job to starting a hobby. With investing - as with life - this fear can be costly. It’s a dynamic of evolution. As the economic psychologist Daniel Kahneman put it in Thinking, Fast and Slow: “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”
The solution? Invest for the long term - and then look away. If you fixate on the ups and downs, you’ll acutely feel the losses and may sell. And the longer you’re invested, the lower the chances are that you’ll make a loss, although this isn’t guaranteed. Take a look at the chart below, which is based on the US S&P 500 stock market.
Let’s say that you invest in shares for one year. Over this time, you could expect - based on history - an annualised return which ranges from around -43% to +61%. However, if you invest for five years your likely annualised return narrows to between -6% and +30%. Stay invested for 20 years and the data shows that your annualised return would range from +4% to +18%. In other words - the longer you’re invested, the more confident you can be that your return will be positive. Please remember past performance is not a reliable indicator of future returns.
Source: Refinitiv, S&P 500, total returns in US dollar terms - 31.12.82 to 31.3.26, annualised returns based on 1yr, 5 yr, 10yr and 20yr periods starting at one month intervals
2. We unknowingly label winners and losers.
The technical term for this is disposition bias. It describes our tendency to sell investments that have risen in value too soon, while holding on to those that have fallen for too long. It is closely linked to loss aversion. Selling when you’re making a profit feels good, while selling at a loss forces us to admit that an investment has not worked out as we hoped.
I’m naturally more of a funds girl, but I also own a small number of individual companies that have piqued my interest. I bought Tesco and Rolls-Royce during the Covid period in 2020.
The charts below begin at roughly the point I invested, so they show the journey I have experienced as a shareholder rather than an arbitrary period of past performance. Over the years, the two investments have followed very different paths. Rolls-Royce has risen dramatically, particularly from 2023 onwards, while Tesco’s progress has been much steadier.
Looking at the charts, it would be easy to label Rolls-Royce my ‘winner’ and Tesco the less successful investment. But that overlooks an important point. Tesco’s share price has also risen since I bought it. It only looks disappointing when I compare it with a much more spectacular performer.
This is where investing biases can creep in. A large gain might tempt me to assume that the good run will continue - or to sell simply because I am worried about losing the profit I have already made.
Meanwhile, a steadier investment can be dismissed because it has delivered less ‘excitement’. Neither reaction tells me what either company is likely to do next.
A more useful question is perhaps, ‘if I didn’t already own this share, would I choose to buy it today?’ That helps shift the focus away from past gains, losses and emotional labels, and back towards the company’s prospects, valuation and place within a diversified portfolio.
I know how difficult it is to time the market, so I’m not one for watching these rises and falls too closely - or reacting to them too quickly. I’m in it for the long term. As for what I’m planning on doing with my Tesco and Rolls-Royce stock… ask me again in a year.
3. We feel safer investing in what we know
Fund manager Peter Lynch popularised the idea of investing in what you know. But recognising a company, using its products or understanding its sector should be a starting point for research, not a reason to invest on its own.
Familiarity can feel reassuring. UK investors may know the domestic market better, recognise many of its companies and value the opportunity to support businesses closer to home. Many UK-listed companies also earn a significant share of their revenues overseas.
The risk arises when familiarity has too much influence over how we invest. This is known as familiarity bias - a tendency to favour the companies, sectors and markets we recognise.
One example is home bias, where investors allocate more to their domestic market. Research from the Investment Association and Opinium found that 47% of UK investors preferred the UK stock market because they were more familiar with it1.
UK investments can play an important role in a diversified portfolio. What you need to do as an investor is think about how they sit alongside other regions and asset classes, rather than allowing familiarity alone to determine what you hold.
The patchwork quilt below shows why. It ranks the returns of 13 markets and asset classes each year from 2016 to 2025, with 2026 covering the first six months. There is no consistent winner: investments move up and down the table from one year to the next.
The UK’s position changes from year to year, just like every other market and asset class. Relying on it alone would leave a portfolio dependent on the fortunes of one market and could mean missing opportunities elsewhere.
The message isn’t to overlook the UK. It’s to avoid asking one market to do all the work. Holding UK investments alongside other regions and asset classes can help spread risk, although diversification cannot guarantee a profit or prevent losses.
What can you do to help reduce the impact of your biases on the value of your investments?
1. Invest regularly
Investing regularly is worth considering for a couple of reasons. The major one is that it helps take the emotion out of making decisions (like with disposition bias above). But it can also help average out the cost of your investments over time. You can read more about how investing little can help you here.
2. Manage risk
It’s important you understand and manage risk. Investing isn’t about avoiding risk, risk is the foundation on which investors potentially grow their money. It’s about taking the right risks, watching out for pitfalls (like inflation) and spreading the risk. You can learn more about how to manage risk here.
3. Think about financial advice
If you’ve got a large portfolio, or particularly complex financial needs, you may want to talk to a financial adviser. They’ll take time to understand your circumstances and get to know you before coming up with a personal financial recommendation. The first step is a free, no obligation chat. So, if you’re wondering if this suits you, why not get in touch? You can find out more about financial advice here.
Five-year performance table
|
(%) |
2021-2022 | 2022-2023 | 2023-2024 | 2024-2025 | 2025-2026 |
|---|---|---|---|---|---|
|
Tesco |
18.7 | -0.2 | 35.0 | 27.8 | 18.9 |
|
Rolls-Royce |
-22.2 | 142.9 | 133.4 |
123.7 |
44.3 |
Past performance is not a reliable indicator of future returns
Source: FE, as at 11.8.26 Basis: Total returns in GBP. Excludes initial charge.
Source:
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Direct shareholdings should generally form part of a well-diversified portfolio of other investments. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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