Recognizing our behavioural biases is one of the most powerful ways investors can improve their long-term results. However, this is often easier said than done. Each investor is a different person, a real human being with personal emotions. Some struggle with fear during market downturns, others with overconfidence during bull markets. Even experienced investors (and their investment advisors) have difficulty identifying which biases are doing the most damage. So, over the years, I’ve learned that improving investment results is often less about finding better investments and more about designing systems that prevent our worst instincts from interfering with rational decision making.
Investor Psychology Matters More Than Stock Selection
Behavioural finance has proven repeatedly that investor psychology has a larger impact on returns than security selection itself. Many investors understand the principles of diversification, long-term investing, and low costs. Yet real world markets still test our motions push us toward action instead of staying the course.
- Fear encourages selling during downturns.
- Overconfidence encourages concentrated bets.
- The urge to “do something” leads to unnecessary trading.
For many investors, the greatest challenge isn’t a lack of knowledge. It is managing the emotional impulses that undermine otherwise sensible strategies.
My Early Experience Trying to Beat the Market
I’ve been fortunate to be investing in the stock market since I was a teenager. And, this early exposure gave me decades of learning, often through trial and error.
When I began earning real income in my early twenties, I did what many enthusiastic young investors do: I tried to “pick winners”. I also tried timing the market. When I thought a stock looked cheap, I would buy it. When I felt the market might fall, I would sell.
Sometimes these decisions worked. But over time, evidence accumulated. Not only in my own portfolio results, but also in the growing body of proof from behavioural finance that supports passive investing. Markets are highly competitive. Prices instantaneously reflect current information. Consistently beating the market through stock picking and timing is impossible. Sure, investors can get lucky from time to time. And they can even beat the market over long periods of time, like Warren Buffett. But eventually times change and markets adjust.
Recognizing this reality forced me to confront an uncomfortable truth: the biggest obstacle to better results was often my own behaviour.
The Entrepreneur’s Urge to “Do Something”
Entrepreneurs in particular often struggle with investing discipline.
In business, action is rewarded. Initiative creates opportunity. Waiting too long can mean missing out. The mindset that helps build a business such as continuous improvement and constant decision-making can be counterproductive when it comes to investing in a portfolio of assets where governance is delegated.
Investing often rewards patience rather than activity.
But knowing this intellectually doesn’t necessarily eliminate the psychological urge to act. I still occasionally feel the temptation to adjust my portfolio, trade around market movements, and pursue new ideas.
So, instead of trying to suppress my instincts entirely, I’ve developed a few simple systems that allow me to “scratch the itch” without damaging my long-term results.
My problem is the urge to “do something”, as I follow the markets closely.
Trick #1: Small Option Trades to Release the Trading Urge
One way I channel the urge to trade is through very small options strategies.
Occasionally I will write covered calls on stocks in my portfolio that I feel mildly bearish about. At other times, I may write naked puts on companies I would be happy to own if the price declined.
These trades are intentionally small relative to my overall portfolio. The goal is not to generate large profits. Typically, I collect a few hundred dollars in option premiums every few weeks or months.
Most of the options I write are:
- Out-of-the-money
- Short-dated
- Small
In many cases they simply expire worthless. That’s perfectly fine. I’m happy to collect small premiums most of the time.
The real purpose is psychological. These small trades allow me to feel like I’m “doing something” without meaningfully changing the structure of my long-term portfolio.
Trick #2: Designing a Portfolio That Generates Constant Cashflow
Another way I manage my investing impulses is through an income-oriented portfolio.
Nearly every investment I own generates some form of ongoing cashflow:
- Dividends from stocks
- Interest from bonds
- Rental income from real estate
This constant stream of incoming cash creates natural opportunities to reinvest. Instead of feeling pressure to sell existing positions or rebalance aggressively, I simply deploy the new capital that regularly arrives in my accounts.
As my net worth has grown over the years, the amount of incoming cash has increased as well. Today, I often buy new securities every few days simply from reinvested income.
Most of the time that cash is reinvested into ETFs or holdings I already own. But the act of allocating new capital gives me a sense of agency and keeps my portfolio evolving gradually without large disruptive decisions.
Trick #3: Maintaining a “Play Money” Account
The final system I use is what I call a “play money” account.
This is a small brokerage account—currently held at Wealthsimple—that contains only a tiny fraction of my overall net worth. In this account, I buy investments that fall outside my primary strategy.
These might include:
- Growth stocks
- Speculative ideas
- “Hot tips” from friends
- Companies I find interesting but wouldn’t include in my main portfolio
Because the account is small, any mistakes are financially insignificant. But psychologically it provides an outlet for curiosity and experimentation.
This structure protects my core portfolio from unnecessary risk while still allowing me to explore new ideas.
Designing Systems That Work with Human Nature
An important investing lesson I’ve learned over decades is that behavioural discipline rarely comes from willpower alone. Instead, it comes from designing systems that work with human psychology rather than against it.
For me, those systems include:
- Keeping my core portfolio simple and long-term
- Allowing small outlets for trading impulses
- Generating steady investment cashflow
- Maintaining a clearly defined “sandbox” for experimentation
These structures allow me to stay mostly passive while still satisfying the natural desire to remain engaged with markets.
What works for me, might not work for you. Each investor has their own biases. Many investors benefit from working with an investment advisor because that advisor can provide some “checks-and-balances” and “talk them off a ledge” occasionally. If investing causes you stress, then using an advisor is often the best solution. Hopefully your advisor can recognize your emotions and design a portfolio and process that suits you.
Managing Behaviour May Be the Investor’s Greatest Edge
In the end, the most powerful investment strategy is often the simplest: stay diversified, keep costs low, and remain patient over long periods of time.
The challenge is behavioural. Markets are emotional environments, and even experienced investors can be tempted to deviate from their plans.
If you can identify the biases that affect your decisions and build systems that neutralize them you may find that improving investor psychology leads to better financial outcomes than any individual stock pick.
