Okay, so I can’t really bet that you’ve made these common investing mistakes. However, I know a lot of people have! I see it all the time. In fact, a huge part of a financial advisor’s job is preventing clients from making these big behavioral mistakes that are often based on emotion or bias… and sometimes it takes some brute force (kidding… ish).
Here are the common investment mistakes I want to address:
- Who you think is “everyone” really isn’t everyone
- You have imbalanced loss aversion
- You didn’t commit to the process at the start
- You have action bias
- Confirmation bias has taken over
- You allowed recency bias to cloud your judgement
Now let’s talk about each of these points in more depth.
1. Who you think is “everyone” really isn’t everyone
You might have said something like, “Everyone I know is selling their stocks before the election.”
No, no they aren’t. You heard three friends talk about selling their stocks, so it feels like “everyone.” The funny thing is, probably only one of those friends ended up actually selling all of their stocks. One other was just contemplating it and the other only sold one of their holdings. They were all talk.
In reality, about 80% of the stock market is controlled by institutional investors. Meaning, it is mostly professional investors who are making big market decisions rather than your neighbors. The vocally opinionated and expressive people we happen to know are not “everyone.”
Even if “everyone” is selling their stocks, that’s not a reason to follow suit. The best decision for YOU and YOUR financial goals will quite likely look different than “everyone” else.
2. You have imbalanced loss aversion
The fear and pain you feel when you lose money surpasses the level of excitement and pleasure you feel when you gain money.
Have you ever been so afraid of loss that you stayed away from the stock market? If so, here is an article for you. If this loss aversion is left unchecked, you could hinder your own financial success.
This is also why it’s crucial to review your risk tolerance with your advisor. Ask her to explain how your investment accounts align with your goals and your ability to handle volatility that could occur in those accounts.
3. You didn’t commit to the process at the start
You and your advisor should have created a plan for your long-term investments. You should have agreed to stay committed to the plan. You should have discussed what you will do if and when losses happen, so you aren’t tempted to make a big mistake (like sell your stocks at a low).
If you have ever abandoned ship mid-plan, you probably were never fully committed to begin with. Be sure you’re clear on your ultimate goals so that this temptation can’t trip you up on your investing journey!
4. You have action bias
You thought that doing something and risking loss was better than doing nothing and risking the same loss.
As humans, we often feel like we must take action! However, when it comes to the stock market and your long-term financial plan, staying put is often the right action to take. If you can’t overcome this compulsion to act, talk to your advisor. She might be able to help divert your desire to “do something” towards something more productive.
5. Confirmation bias has taken over
If you have an opinion about a money topic or the stock market, you might find yourself doing some research. I suspect you’ve been searching for information that confirms what you already believe.
Because of your confirmation bias, the information you find most appealing and actually remember ends up being information that supports your original opinion. You end up not considering the alternatives as thoroughly as you should. As a result, you might be underinformed.
6. You allowed recency bias to cloud your judgement
What you experienced recently has overshadowed your longer-term beliefs.
For instance, the best indicator of a client’s risk tolerance is what has most recently happened in the stock market. I wish this wasn’t the case, but it is quite often true. If stocks have been on a 5-year winning streak, people find themselves feeling aggressive. They want in the market, so they can make money too! However, if a market correction has recently occurred, people tend to be a bit skittish.
Their life circumstances haven’t changed. Their needs haven’t changed. What has changed is what they most recently experienced.
For the record, I am not immune to making many of these mistakes myself. Don’t feel ashamed if you see yourself in any of these descriptions. This is why even financial advisors need a financial advisor. We all need someone to look out for and point out our own biases!
Now that you are aware of some common mistakes, I hope you are able to catch and squash them before they affect you!