Last week, I mentioned some investor errors investors make, and decided to put together a top 10 list of broad and common mistakes.
So far, we have looked at Excess Fees, and Reaching for Yield. Today we are going to ever so briefly look at mistake number three — behavioral issues in investing. (for far more details, see this collection of posts).
3. You Are Your Own Worst Enemy: Your emotional reactions to market events is yet another detriment to your results. Typically described as Fear & Greed, it is more complex than that. But for starters, Fear & Greed does enough damage.
Do you get excited about hot new companies? Do you love chatting about stocks at cocktail parties? On the other hand, do your holdings keep you up at night? Are there periods where you cannot bear to even open your monthly statements?
These all suggest that you, like most humans, are an emotional investor. This manifests itself in two ways: With heavy buying of equities at the regardless of valuation as excitement builds near the top of the cycle (most public ownership of equities occurs this way); secondly, with panicked selling, typically near major inflection points.
You can take steps to protect yourself from, well, yourself. Predetermine your exits and stick with it. Make decisions while objective, before emotional trouble hits.Set up a Mad Money account with a less than 5% of your capital. This will allow you to indulge “your inner Cramer.” If it works out, that’s great — maybe you are thr next Steve Cohen. If it’s a debacle (and the odds are it will be), it’s a terrific lesson that will serve to remind you that trading in and out of stocks like a deranged hedge fund manager is not your forte. Be thankful it wasn’t most of your retirement assets that you lost.
Your emotions are often the enemy of your financial well-being. Learn how to keep them in check, or to protect yourself from them, to become a better investor.
Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Mutual Fund vs ETFs
5. Asset Allocation Matters More than Stock Picking
6. Passive vs Active Management
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For