Most people think that investing is about making rational decisions. However, in reality there is a lot of emotion too. Big market moves are often fueled by the emotional reaction of investors. Many investors sell not because their investing strategy calls for a sell, but rather because the rest of the market is selling.
Alongside emotional driven decision making, we take a look at 6 of the most common investing mistakes.
#1 Buy high, sell low
Although most people understand the logic of buying low and selling high in the stock market, many investors realise that they are doing the exact opposite.
There are 2 reasons why this happens.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Most people are uncomfortable about taking risks.
Hence, many end up investing when prices are high (feels safe) and selling when the market drops (due to fear).
2. Most investors do not track their investments.
Most investors only realise this when they start tracking their investments. If you think you are buying low and selling high, but don’t have the numbers to show it, start tracking your returns today.
And stop trying to time the market for the best entry point.
#2 Becoming emotionally attached to their investments
Using emotions as a reason to keep investments that are not performing well is a bad move.
Perhaps these were given to you when a family member passed away, or they are an investment in a company you once worked for, or they were the first stock you purchased in the stock market.
Whatever the reason you have them, you should never allow emotional attachment to keep something that could be sold and reinvested into a better performing investment.
#3 Short Investment Horizons
Investment decisions should only be made with the aim to grow your wealth over the long term. While short-term performance is interesting, it is difficult and time consuming to repeat your results infinitely.
Your investment horizon can make a huge difference to your returns.
Historical data have shown that over 1 month, major indices reported losses 40% of the time. When you stretch that over 5 years, the losses drop to 15% of the time. Extend even futher to over 20 years and it drops to a negliable percentage value.
Of course, future results are not reliably predicted by past results.
If you focus solely on what an investment could do in the short-term, then you are missing out on what it could potentially do in the long-term, and that leads to a potential drop in the gains you could make.
#4 Being too active in the stock market
Much like anything in life, it is easy to get caught up in the idea of constantly changing your investments.
This is particularly common when the markets are experiencing heavy change. Investors tend to feel that they need to be doing something to maximise or protect themselves when there are big market movements.
But, if you have a investment portfolio that is structured and follows a clear strategy, there really is no need to make a change just for change sake.
Every time you make a trade, cost is incurred. Do this too often and your returns may be wiped out by the transaction costs that you have to bear.
#5 Not managing money efficiently
When it comes to thinking about money, many people find it easier to compartmentalize different financial needs.
They mentally allocate money to daily expenses, savings, holiday needs etc. Although it may be easier to mentally account for money this way, it could be a very inefficient way of dealing with finances.
As an example, there are many people who put more money in their savings account than they use to pay off credit cards. But, savings accounts have low interest rates while credit cards have high ones. Often, it is better to use the savings to reduce the credit card balance as they will save money not paying high interest.
However, because they they view these sums of money separately, they miss out on the possibility of shifting the money around.
#6 Not viewing investments as a portfolio
It is easy to focus only on the individual stocks. However, without an overall plan you could be missing out on making bigger gains.
When you look at your investments as a portfolio, something that looks like a bad decision alone, could actually be a positive one. Making a small loss on a bad investment may allow you to siphon the recovered capital to a better performing investment.
While you cannot fully control what your investments will do in the future, by using this information you can at least be aware of bad habits to avoid.