Is Familiarity Bias a Threat to Your Investments?

We are all guilty of familiarity bias. Familiarity bias is choosing or liking things because they are familiar to us. And although it might be fine to go to your favorite restaurant again and again, it’s not necessarily the best way to choose something as important as where to invest your money. Here are some of the ways you may be unknowingly indulging in familiarity investing — and what you can do about it.

Investing Only in Companies You Have Heard of or ‘Like’

Just because you love your flat-screen television or heard that a new clothing chain is popular doesn’t mean these companies are good investments. Before you put your money where your bias is, make sure to conduct a real analysis of the company and the industry rather than make an emotional decision based on your perceptions and preferences.

Choosing Only U.S. Investment Opportunities

The global economy keeps growing, and in many cases foreign stocks outperform those in the United States. Yet, many people are hesitant about making investments abroad — out of fear, a lack of knowledge or both. Familiarity investing only at home can lead to a lack of diversification, which can harm your portfolio, so it’s a good idea to look into all available options — all over the world — rather than staying too close to home.

Committing to Investing in the Company You Work for

Employers often offer their employees a “share” of the business, creating opportunities to invest in themselves and their futures and, hopefully, have that investment pay off. But this can be risky if it encourages you to put too much of your money in one place rather than having a broader portfolio and, thus, a smaller risk. Of course, there is nothing wrong with investing in yourself and the work that you do, but know the reality of your workplace and risk — and invest accordingly.

There is nothing wrong with sticking to what you know — we’re human, after all, and take comfort in the familiar. But it’s important to understand that this is an inherent bias that may not be the best foundation for making decisions about your investments. As with anything that is such a large decision, try your best to be objective, do your research, and make decisions based on what you find instead of what you feel. And, perhaps most important, consult a professional to help you consider and choose the best options for you.

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