While it’s great to learn from your mistakes, they can be costly lessons in investing. Thankfully, many of the mistakes made by long-term investors follow the same biases and flaws, and they can be avoided beforehand with some preparation.
Here are some of those common investing mistakes to avoid:
Falling “in love” with an investment
Infatuation with a certain stock or other investment can blind you from its flaws, and deter your long-term success. Investors become attached to investments for many reasons (they work at the company, they think it’s a “surefire” investment, amongst other misconceptions) but the result is almost always the same: they take a concentrated position.
One of the costly investing mistakes to avoid is taking what is essentially a bet because of your passion for one investment. Diversification can reduce risk while increasing your returns, while concentration can have the opposite effect.
Letting recency bias take hold
We have a tendency to believe that events that have happened recently are more likely to continue, while those in the past are less likely to happen. When it comes to the stock market, this psychological bias leads us to pay heavy attention to recent performance while ignoring historical results. For instance, after a few days of stock market dips, you’ll be lead to believe that trend will continue indefinitely.
The truth of the matter is that where the market will move next can’t be predicted by its day-to-day, or even annual performance. You shouldn’t let recent trends buck your focus on the performance of the market in light of your long-term goals.
Failing to account for risk
Losing sight of your risk tolerance is another one of the common investing mistakes to avoid. Remember, good investing sometimes feels lousy. Often, your success as a long-term investor relies on your ability to ride out the ups and downs of the stock market, in order to see growth over a longer time-frame.
While most investors create their initial portfolios with risk in mind, they can be lead astray in the face of higher returns. You might forget about your inability to stomach volatility, for instance, when there is a temporary boom in the markets.
Working with a broker
While you’re probably aware that different financial advisors can provide varied returns, you might not realize that they can be held to completely different legal standards. While some have to legally provide advice that’s in your best interests (under the fiduciary standard), others can provide advice based on commissions, sales quotas, and hidden fees (through the suitability standard).
Although the fiduciary standard is thrown around a lot in advisors’ marketing, the only way to truly tell is to see if yours has a Series 7. This entitles advisors to receive those aforementioned commissions and provide advice that is only deemed “suitable” for your interests. Fiduciary advisors have to surrender this license and the leeway it provides when they become one.
Learn more about the costly investing mistakes to avoid
At LexION Capital, we are data-driven, and our investment decisions are backed by Nobel Prize-winning research. We help our clients avoid the emotional and psychological investing mistakes through our well-crafted plans. If you’d like to learn more about investing mistakes and how to avoid them, contact us today.