Falling in love with investments can lead to bad choices and being let down. Research in behavioural economics has shown that feelings do not help when building wealth. How can investors keep emotion where it should be – and not in their financial decisions?
As with human relationships, attachment to investments tends to build over time. People often overvalue what they already own – they have sunk time and commitment into their choices, and that familiarity can eventually cloud judgement. Studies have shown this as a common flaw in decision making; a sense of ownership allows feelings to compromise hard-headed discipline in managing portfolios. Investors should have clear strategies and selling rules to keep their financial decisions objective and unemotional.
Surprisingly, this bias often does the most damage with investments that perform well. As a result of the outperformance, a holding grows to become a much bigger part of a portfolio, increasing the risk should things change. Of course an investor sees a winning investment as a source of pride and so may be reluctant to sell or reduce it. Who would not love to keep showing a big success in their savings. Emotion drops people’s guard and can delay action when risks increase.
Feelings can create issues with bad investments, too. Behavioural research demonstrates that the pain of losing something feels roughly twice as intense as the pleasure of gaining something of equal value. For investors, this may mean holding onto declining positions because selling would force us to acknowledge the loss. We tell ourselves shares might recover, when often we are simply avoiding the emotional discomfort of admitting a mistake.
The unhelpful impact of emotion in investment has been recognised in a number of behaviours. One of the most pervasive is home country bias, the tendency to prefer and overweight exposure to an investor’s own country, simply because it feels familiar. It had started to reverse - UK investors withdrew nearly ten billion pounds from UK funds in 2024 - yet many private portfolios remain heavily tilted toward British companies.
Over five years measured in pounds, the FTSE 100 index of major UK companies slightly lagged its American counterpart, the S&P 500. But over ten years, investing in the US rather than the home UK stockmarket has delivered much better performance. The comfort of the familiar has proved costly.
The pattern plays out repeatedly in portfolios heavy with well-loved brands. Brand affinity proves particularly seductive because it conflates our identity as consumers with our judgment as investors. But customer satisfaction and shareholder returns operate in different realms. A company can deliver wonderful products while destroying shareholder value through poor capital allocation or unsustainable pricing.
Investors often hold familiar names long past when fundamentals justify the position. The attachment is often not to business performance but to the brand itself. Iconic whisky and spirits brands have not stopped Diageo shares from falling 40% in the last five years. Over the previous two decades these shares had quadrupled in value. Investors need to separate their warm feelings for past performance and brands from the commercial challenges in a business.
How might investors guard against emotional decision-making? First, establish clear rules for portfolio rebalancing and stick to them regardless of how you feel about particular holdings. Second, maintain a written investment policy that spells out your risk tolerance, time horizon, and criteria for buying and selling. When emotions run high, this documented framework provides an anchor for rational decisions. And consider working with a financial adviser who can provide dispassionate perspective, particularly during market extremes when emotion threatens to override judgment.
The irony is that emotional detachment from investments often produces better emotional outcomes in the long run. Investors who can view portfolios dispassionately, rebalancing mechanically and selling without regret, tend to accumulate more wealth and experience less stress than those who fall in love with holdings.