According to the BBC, the UK experienced its third heatwave of the year on Saturday 12 July, with amber heat health alerts covering most of the country.

While you likely understand how the heat can strain your body, you might not have considered how it can subtly influence your decision-making and the effects this could have on your finances, particularly regarding your investments.

You may also find that several cognitive biases become more pronounced in hot weather. These can further derail your progress towards your long-term goals and steer you towards impulsive choices.

Continue reading to find out what the research says about sunny weather and your investment decisions, and how you can protect your wealth as temperatures rise.

Changes in temperature can affect the way your brain operates

Your brain has a narrow temperature range for ideal function. When it gets too hot, your cognitive performance can temporarily decline.

A study published by the Yale School of Medicine found that even slight increases in temperature can profoundly affect your brain’s activity.

When the environment gets hotter than your brain can comfortably handle, neurons – the nerve cells responsible for sending and processing information – are disrupted. This often leads to a drop in memory, concentration, and decision-making ability.

This matters because sound investment planning requires clarity, focus, and self-control. You need to calmly weigh up your long-term goals against short-term movements in the market, while resisting the urge to react emotionally during periods of volatility.

In the warmer weather, this becomes more challenging. You may find it harder to absorb new information, recall key facts, or think clearly about the potential consequences of decisions.

Research reported by Science Direct confirms this. It states that higher temperatures are associated with lower decision quality, and could result in temperature-induced cognitive errors and risk-taking, two qualities that aren’t ideal when you invest.

The heat could exacerbate cognitive biases that harm your portfolio

As well as impairing your general decision-making skills, the heat can also exacerbate several cognitive biases.

One of these is “overconfidence”, which occurs when you overestimate your knowledge or ability to predict outcomes. This might lead you to believe you can time the market or pick high-performing companies based on instinct.

In the heat, you may become more likely to trust snap judgments or fail to consider the potential risks. Doing so might derail your progress towards your long-term goals.

Similarly, “recency bias” occurs when you give more weight to recent events than the broader picture.

For instance, if markets have performed well over the past month, you might assume this trend will continue indefinitely. Or, if you’ve seen a sharp decline in the overall value of your portfolio, you may react emotionally and sell your holdings.

In hot conditions, you may have less patience and become more reactive, making it harder to assess situations objectively.

It’s vital to keep a cool head, especially in the warmer months

In the warmer summer months, it’s especially vital to slow down before making any important financial decisions.

If you’re feeling hot, irritable, or mentally foggy, you may want to give yourself a cooling-off period. Doing so can help you gain the clarity needed to make a considered choice.

Also, don’t be afraid of relying on others, particularly your friends and family. If the heat impairs your decision-making, it can be pragmatic to run any critical choices by your loved ones, as they could help you view your options from a fresh perspective.

Of course, working with a professional can offer even greater value when it comes to making financial decisions.

At Optimum Path, we will support you through any investment decisions, ensuring you’re keeping a cool head. We will also ensure you’re keeping your eyes on the horizon and not reacting to any short-term market movements, especially if the heat clouds your judgment.

Be sure to contact us now to find out how our Chartered financial planners can help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.