Investing hard-earned cash? The right outlook can set you up for success. Even an investing obstacle like loss aversion can be overcome—so you can work toward your financial goals freely and confidently.
What’s loss aversion?
It’s a cognitive bias that spans centuries of evolution—the tendency to feel the pain of a loss more acutely than you would the joy of a gain. In fact, researchers believe that most people feel the pain of losing something twice as much as they felt the joy of gaining its equivalent.
Loss aversion and investing
It’s easy to see how loss aversion can keep people who want to invest from parting with their money—the possibility of any loss can be overwhelming. But how can it affect experienced investors?
- Being too conservative – Loss aversion can lead to risk aversion, the tendency to lean toward low- or no-risk scenarios. Investors who are too conservative may have portfolios that don’t yield the returns they need to reach their goals.
- Panic selling – When the market dips, some investors may sell to avoid deep losses. In this case, loss aversion impacts the ability to weather the volatility and realize gains when the market rebounds.
- Holding on to hope – By the same token, loss aversion can keep investors from selling at a loss because they perceive it as a personal failure. Instead, they wait too long for the market to rebound even though selling the asset may be the best choice.
Are you loss averse?
Likely, yes. Most of us are—courtesy of our primitive ancestors who had so little that protecting it at all costs far outweighed the thought of risking it for more. With that type of emotional hardwiring, it’s no wonder overcoming loss aversion takes deliberate action.
Here are five tips that may help:
1. Be realistic with your investments
Don’t overextend yourself financially. Only invest what you can comfortably part with and ask yourself what would happen if you lost some of that investment. If you’re not comfortable with the answer, reevaluate how much you’re contributing.
2. Don’t let your heart lead
Whenever possible, take the emotion out of investing to avoid hasty, illogical decisions. Easier said than done? Try a digital investing service like Truist Invest, which uses algorithms to analyze your portfolio daily and adjust it for you when necessary.
3. When it comes to investing, think long term
Investing in securities or saving for retirement is not a get-rich-quick scheme—it’s a long-term plan. Longer time horizons can help you face market dips more comfortably—and potentially give you more opportunity to compound interest.
Plus, research found that people were less loss averse when they made decisions based on their future selves.1 And if you’re unsure about long-term planning on your own, Truist Invest Pro pairs human advisors with a digital investing platform to offer guidance at crucial moments.
4. Think like an investor
Where others see loss, investors see opportunity. They’re not afraid of a little market volatility because they understand tip #2, and their investing strategies hinge on tip #3. They don’t let fear sideline them because there’s no reward without some level of risk.
5. Be consistent with your investing
Find an investing cadence and stick to it. You should contribute only what you can afford comfortably—and at a pace you can manage. Some people use dollar-cost averaging2 to invest consistently each month, allowing them to purchase varying share amounts at regular intervals instead of missing out on potential gains by investing a lump sum all at once.