13/02/2025

Behavioural finance: The effect emotions could have on your financial decisions

While you might intend to make your financial decisions based on facts, emotions creeping in from time to time is normal. Recognising when emotions might be influencing your judgement could mean you’re better able to evaluate what’s right for you.

Last month, you read about how past experiences could affect your decisions. Now, read on to find out how emotions could do the same.

Your emotions may affect how you respond to different situations

Your emotional state can often affect how you feel about different situations.  This, in turn, can change how you respond to financial decisions.

In some cases, your emotions might mean your choices don’t align with your long-term goals. For example, if you’re fearful that you’ll lose money during a market downturn, you might be more likely to sell investments impulsively and turn paper losses into a reality.

It’s not just “negative” emotions that could harm your decisions either.

Emotions that you might normally view positively could be harmful when they influence your financial decisions. For instance, feeling excited might mean you’re more likely to overlook red flags or skip seeking further information because you’re keen to get started.

Giving yourself time could help you avoid emotional investing

One of the simplest steps you can take to reduce the effect of emotions on your financial decisions is to give yourself some space and time.

Let’s say a friend is speaking to you about an opportunity they’ve come across and they’re encouraging you to invest. If you’re in a good mood and feeling confident, you might feel excited about the prospect of the potential returns. But, if you’re already feeling anxious or down, you may be more likely to focus on the investment risks.

Giving yourself time to think through the different options could allow emotions to subside and present an opportunity to consider what’s driving your decision.

According to December 2024 research from the Financial Conduct Authority, rushing financial decisions is something many investors are guilty of at some point.

Indeed, two-thirds of investors aged between 18 and 40 spend less than 24 hours deciding on an investment, and 14% finalise their decisions in under an hour. Just 11% took more than a week to decide if an investment was right for them.

In many cases, rushing into a decision led to regret. 4 in 10 investors surveyed said they regret falling for investment hype. It’s likely emotions played a role in the initial decision that investors came to regret. For example, 32% said they feared missing out on a good opportunity and 26% were driven by the desire to feel good in the moment.

So, don’t rush into decisions but allow yourself at least a few days to carry out research, if necessary, consider the alternatives, and weigh up if it’s right for you.

Other steps could help you keep emotions out of your investment decisions too. You might:

• Set out a financial plan. Having clear goals to work towards and a better understanding of the type of investments that could be appropriate for your circumstances is often useful
• Focus on your long-term goals. This could reduce the chance of you reacting emotionally to short-term market movements
• Diversify your investments. Spreading your money across multiple investment opportunities could mean you’re less exposed to market volatility and the emotions sharp rises or falls can cause.

While you can’t completely stop emotions affecting how you view different investment or financial opportunities, you can change how you respond to them. Taking steps like those above could mean you’re more in control and able to spot when emotions might be clouding your judgment.

Get in touch to talk about your financial plan

Working with a financial planner could help you reduce the impact emotions have on your financial decisions. Having an outside perspective may highlight when decisions don’t align with your goals or the financial plan you’ve previously set out.

If you’d like to arrange a meeting with one of our team, please get in touch.

Next month, check our blog to find out how biases could affect how you process financial information.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.