Investment opportunities are everywhere, but finding the right ones for you can be difficult. It might seem easier to just follow what your peers are doing, but you may not make informed decisions specific to your financial circumstances. Not everyone has the same level of risk tolerance or investment goals, so it is important to do research and find the investments that are suitable for your portfolio. Learn more about the various biases in investing, strategies for finding opportunities, and some tips for managing your portfolio.

What is Investment Bias?

Investment bias is a bias that can occur when making investment decisions. Bias is a natural part of being human, and something that investors could experience. These investment biases can act as a roadblock and prevent you from making decisions that could help you reach your financial goals. Let’s take a look at some common investment biases.

Common Investment Biases

According to Forbes, there are multiple types of investment biases. These biases can be common among investors due to the nature of investing, however, there may be ways to avoid and overcome these biases.[1]

Recency Bias

Recent events in society can have enough influence on our lives and thought processes, even more now with social media, that we tend to quickly forget the past when something more relevant comes along. With this kind of bias, investors may give more attention to recent events over historical ones. An example of recency bias is people thinking the increased fundraising market of 2021 would continue into 2022, when, as we saw, it did not.[2] Past performance does not guarantee future results, which is important to keep in mind because there is no way to guarantee the same outcomes of investments at different points in time.

Anchoring Bias

Similarly, anchoring bias can occur when investors “anchor” high hopes on investments based on their previous record in the market. This bias can be harmful because it removes some of the rational decision-making and can end poorly if the investment does not perform as well as originally expected. Anchoring bias and recency bias are both connected by preconceived expectations. One is expectations for the future and the other is expectations from a previous record. An example of anchoring bias is if an investor makes an early-stage investment in a company and receives a large return on investment after the company conducts its IPO, the investor might think that all early-stage investments could have the same outcome as their previous investment.

Confirmation Bias

Confirmation bias is the tendency to seek information that supports what we already believe and ignore the information that could contradict these beliefs. This bias can be harmful to investors because they can be led to focus only on information that would reinforce their opinions about the investment. An example of this is if an investor really loves Elon Musk, they might assume that his companies will always perform well. This may become confirmation bias if they only seek out information that confirms their belief. The investor may ignore information that contradicts their preconceived notions and choose to continue making investments in his companies.

Overconfidence Bias

Overconfidence bias is the tendency to overestimate one’s understanding of financial markets or specific investments and disregard data and expert advice. This bias can cause investors to believe that they have enough information to make an investment, when they may not have a full grasp of the situation. It is important to keep an open mind when choosing investment opportunities.

Negativity Bias

­Alternatively, negativity bias is the tendency to give greater attention and weight to negative information and/or experiences. This can influence investment decisions, so being aware of this bias can help with avoiding pessimism and missing out on opportunities.

Herd Mentality Bias

Herd mentality is the tendency to be tempted into investing in a company after seeing peers do it. This is similar to “fear of missing out” (FOMO) investing because people want to be included in the popular investments that others are participating in. This bias can be harmful to investors if they do not have the same level of risk tolerance or investment goals. Investors need to be aware of this bias and make informed investment decisions specific to their personal financial situation and objectives. An example of this is from May 2024 when GameStop (NYSE: GME) experienced a “second rally” similar to the one back in 2021 where investors fell into herd mentality and many jumped in to purchase stock. There was an upward movement in stock price of 179% from May 10-May 14. However, by market close on May 17, the stock decreased 70% from its recent high, and investors lost a total of $13.1 billion.[3]

Considerations for Investing

When considering making an investment, it is important to be fully informed in your decision making. The following are things you may want to consider before making investing decisions to help you with biases.[4]

Set Clear Investment Goals

Define your investment objectives and risk tolerance before making any investment decisions. Having a clear plan could help you resist the urge to chase short-term trends that may not align with your long-term financial goals.

Conduct Thorough Research

Before investing, thoroughly research the asset or market sector. Understand the fundamentals, historical performance, and potential risks associated with the investment. This approach can help provide a balanced perspective and helps mitigate the influence of biases.

Avoid Emotional Triggers

Be mindful of emotional triggers such as market hype, social media buzz, or peer pressure. Take a step back and assess investments objectively rather than reacting impulsively to external stimuli.

Diversify Your Portfolio

Diversifying your private market portfolio can be challenging, particularly if you are new to the space. However, it is important to maintain a diversified portfolio across different asset classes and sectors. Diversification can help mitigate risk and can reduce the impact of an investment decision driven by FOMO or other investment biases. It can be important to remember that diversification does not guarantee a profit or protect against losses. However, it can help you mitigate your risk and potentially increase your opportunities for growth long term.

Stick to Your Investment Strategy

Stay disciplined and adhere to your investment strategy even during periods of market volatility or uncertainty. Avoid making sudden changes to your portfolio based on short-term market fluctuations or perceived missed opportunities.

Draw a Personal Financial Roadmap

It is important to figure out your own goals and risk tolerance. You can do this on your own or with help from a financial advisor. There is no guarantee of outcomes, but having a plan can help you to meet your financial goals.

Avoid Circumstances that can Lead to Fraud

Make sure that you are asking questions and checking unbiased sources so that you are not accidentally investing in scams. Talking to financial professionals can help you avoid these scams.

Final Thoughts

Investment opportunities are everywhere, but finding the right ones for you can be a challenge. Understanding investment biases, applying practical considerations, and avoiding common pitfalls like FOMO investing can help you meet your investment goals. You might also choose to consult with a financial advisor when making investment decisions, especially if you are unsure of the opportunity. By understanding these biases and adopting strategies to mitigate their influence, investors can enhance their ability to make objective, well-informed investment decisions aligned with their financial goals and risk tolerance levels.

Want to learn more about tips for investing? Check out the following MicroVentures blogs to learn more:

• Avoiding the FOMO Effect
• Navigating Deal Sourcing: How to Select Investment Opportunities
• Fulfilling Financial Instruments: Common vs Preferred vs Convertible
• Tale of Two Metrics: Market Cap and Market Value
• What’s It Worth? Navigating Inflated Startup Valuations

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

 

[1] https://www.forbes.com/advisor/in/investing/4-common-investment-biases-you-should-avoid/

[2] https://news.crunchbase.com/business/global-vc-funding-unicorns-2021-monthly-recap/

[3] https://www.nasdaq.com/articles/meme-stock-flop:-gamestop-investors-lost-over-$13-billion-last-week

[4] https://www.sec.gov/investor/pubs/tenthingstoconsider.htm

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.