Can it be true that investing success is influenced more by investor behaviour than the investment markets? We’re convinced it is. It doesn’t matter how much equities appreciate in value if an individual investor makes the wrong investment decision at the wrong time, possibly for the wrong reason. Once you realise this, it becomes clear that avoiding the mistakes we humans are prone to make, is key to your investing success.
Here are 6 investment mistakes, avoid these and give yourself a much better chance of getting decent returns:
Seeking confirmation of your own beliefs: Our brains are wired to seek and believe information that validates our existing beliefs. Our minds love proof of how smart we are. Don’t decide on a particular investment or strategy without taking into account contradictory evidence.
Confusing recent trends with ongoing trends: A common investment mistake is to believe that the current trend of the day will continue. Recent events tend to carry more weight in our minds when evaluating the odds of something happening in the future. The best way to avoid this mistake is to have an investment strategy/philosophy that you act on rather than reacting to current events.
Overconfidence: Successful and driven people often assume they will be just as good at investing as they are at other aspects of their life. Overconfidence is a common cognitive bias; we constantly overestimate our abilities, knowledge and our future prospects. If you can admit that you have no special advantage, you will give yourself an enormous advantage.
Going for broke (betting big) It is tempting to go for big wins in your quest for investing success. However, going for broke also means potentially large losses, which can be hard to recover from. Avoid this issue by having a long-term investment strategy/philosophy from which you don’t deviate.
Staying at Home: The “home bias’’ is the tendency to invest disproportionately in markets that we are familiar with e.g. the Irish stock market, your own industry or your employers company stock. The solution here is to diversify across geographies and sectors, to invest in a globally diversified basket of thousands of company shares.
Negativity: Our brains are wired to bombard us with negative thoughts. One part, the amygdala, is a biological alarm system that floods the body with fear signals when we are losing money. So, when markets plunge (as they have done and will continue to do), fear takes over and we act irrationally. Avoid this by preparing in advance, understand how markets work, learn what has happened in the past and use that information as a guide to what may happen in the future.