Classic Investing Mistakes
How many can you prevent yourself from making?
Year after year, in bull and bear markets, investors make some all-too-common blunders. They have been written about, talked about, and critiqued at some length – and yet they are still made. You can chalk them up to psychology, human nature, perhaps even a degree of peer pressure. You just don’t want to find yourself making them more than once.
#1: Caving into emotion. The deVere Group, which consults high net worth investors around the world, recently surveyed 880 of its clients and found that even with their experience, some had made the equivalent of a rookie mistake – 20% had let fear or greed prompt them into emotional investment decisions.
Investors use past performance to justify their greed – it did well recently, I better buy more of it – but past performance is merely history and represents a micro factor versus macroeconomic factors influencing sectors and markets. Fear prompts panic selling. How many investors draw on technical analysis or even stop-loss limits when shares suddenly decline? A stop-loss limit is handy for those who don’t want to watch the market every day – it instructs a brokerage to sell a stock if it drops below a specific value, often in the range of 8-10% of the purchase price.
#2: Investing without a strategy. Some people invest with one idea in mind – making money. An outstanding goal to be sure, but it shouldn’t blind them to other priorities such as tax efficiency, managing risk and reviewing asset allocation. Even 22% of the investors in the deVere poll confessed to this.
#3: Not diversifying enough. Have you ever heard the phrase “familiarity bias”? This is when investors develop a “home team” attachment to an investment. Just as sports fans stick by the Celtics and the Cornhuskers and the Cubs through thick and thin, some investors stick with a few core investments for years. Maybe they work for XYZ Company or their mom did, or maybe they like what XYZ Company represents, so having a certain percentage of the portfolio in shares of XYZ Company gives them a good feeling. If XYZ Company craters, they won’t feel so good. You can hold too much of one investment, especially if a company rewards you with its stock.
Read More »