The concept of “safety in numbers” is well ingrained in human behaviour. For instance, if your town was being invaded by marauders, it helped if everyone banded together to fend off the attack.

However, when it comes to investing, sometimes it’s better to distance yourself from the crowd. It takes courage to turn right when most others are going left, but history has shown that individual investors typically make poor decisions based on emotions rather than logic. If you’re looking to build wealth for the future, here are five potentially destructive behaviours linked to investor psychology that you should try to sidestep.

1. Loss aversion. Studies have shown that the pain of a loss is twice as impactful relative to how a gain makes us feel good.¹ Since losing money can really hurt, many investors go to extreme lengths to avoid a loss. For instance, a stock price might be declining because the company is heading toward bankruptcy, but instead of selling you hang on since it’s not “officially” a loss until you sell. Chances are that the stock price will continue sinking and you’ll actually lose more money as a result of this irrational behaviour. Sometimes it’s better to take your loss and pursue the next opportunity.
   
   
2. Herd mentality. This is a good example of the “safety in numbers” principle. Investing can be risky, so it’s comforting to follow the crowd and make decisions according to popular thinking. The danger is that sometimes a stock price may rise beyond its true worth simply because the masses are tripping over themselves to buy it. Conversely, a stock might be oversold because everyone seems to hate it. While not easy to do, ignoring popular opinion and making decisions based on sound research and analysis should serve investors well.
   
   
3. It feels great when you’re on a roll and can’t seem to do anything wrong. However, investors need to keep this behaviour in check and act rationally. If your stock picks are performing well, you might think your investing skills are better than they actually are. Sometimes success is based on luck or because a certain industry (or the overall market) happens to be thriving, and you’re just along for the ride. Once you’re overconfident, you may find yourself investing more recklessly and opening the door to eventual failure. Keep a level head.
   
   
4. Sometimes an investor’s thinking doesn’t adapt to changing circumstances. For example, you could become anchored into assuming that the price you paid for a stock represents fair value, even if the company’s fundamentals start deteriorating. As the market bids down the stock price, you might assume it’ll rebound because it’s below your perception of fair value, so you stay put and end up losing more. Remember that stock prices decline for a reason and don’t always bounce back.
   
   
5. Confirmation bias. You know how people may form an opinion about someone and will look for proof that their opinion is right? They might even ignore facts that don’t fit their narrative. Investors do the same thing when holding particular views about a given company. Their insecurity or ego makes them only seek out information that confirms their beliefs, potentially leading them to make unwise investments. Instead of giving in to confirmation bias, objectively consider all data points in order to make rational decisions.

Human behaviour is complex and often rooted in psychological factors. Generally speaking, successful investors avoid emotional responses and stay disciplined under all market conditions. If you’re prone to unproductive investor behaviours, consider working with an advisor who has the skills and experience to keep you focused on your financial objectives. Contact an Alterna Advisor for impartial, personalized advice that can help you grow long-term wealth.