In the often confusing and seemingly irrational world of investing, many investors make mistakes that prevent them from achieving their financial goals. This guide reviews nine of the most common pitfalls.
Mistake #1: Believing Crowd Support Guarantees Success
Warren Buffett famously advised, “Be fearful when others are greedy. Be greedy when others are fearful.” It’s natural to feel secure when investing in an asset that’s popular among friends, neighbors, and the media. However, this “safety in numbers” approach is often misguided. When everyone is bullish and invested, any positive news has little impact as few new buyers remain. Conversely, during pessimistic times, even small positive news can drive value up, as many have already sold. In short, maximum opportunity often lies in pessimism, while maximum risk lurks in euphoria.
Mistake #2: Using Current Returns as a Future Indicator
“Past performance is not a reliable indicator of future performance.” – Standard Disclaimer
Faced with an overwhelming amount of information, investors often simplify by assuming that recent returns reflect future trends. While this is tempting, it often leads to buying at highs after strong gains or selling at lows during downturns. For example, shares have surged over the past two years, despite challenges such as interest rates, recession fears, and geopolitical unrest. History shows that complacency—thinking “this time is different”—can lead to disappointment, as market cycles persist regardless of recent returns.
Mistake #3: Trusting “Experts” to Predict the Future
“Economists put decimal points in their forecasts to show that they have a sense of humor.” – William Gillmore Simms
While expert forecasts can provide valuable insights, no one has a flawless crystal ball. Grand predictions of prosperity or imminent crashes often miss the mark. Market analysts are just as susceptible to biases as anyone else. The true value of investment experts lies in context and issue analysis, not crystal-clear forecasting.
Mistake #4: Assuming Shares Can’t Rise During a Recession
“It’s so good it’s bad, it’s so bad it’s good.” – Anon
Many were skeptical when markets rebounded after the March 2020 pandemic low, despite a recession and declining earnings. Markets, however, are forward-looking; when economic conditions are bleak, they’re often already priced into shares. Historically, the best gains are made when the news is still bad. On the flip side, after economic recoveries, market highs often precede downturns, as overheated economies spur rising interest rates.
Mistake #5: Letting Strong Opinions Cloud Judgment
“The aim is to make money, not to be right.” – Ned Davis
Strongly held, often bearish views can hinder sound investing. While concerns about debt, aging populations, or political changes can have valid points, focusing solely on potential downsides often leads to missed opportunities. Pessimism may be proven correct eventually, but it can prove costly in the meantime.
Mistake #6: Checking Investments Too Frequently
“Investing should be like watching paint dry or watching grass grow. If you want excitement…go to Las Vegas.” – Paul Samuelson
Frequent portfolio checks can lead to overreaction. While markets trend positively on a monthly basis 60% of the time and on a yearly basis 70%, daily fluctuations are closer to 50/50. Excessive monitoring can increase anxiety and prompt poor timing decisions, undermining long-term goals.Introduction
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Rick Maggi CFP, Financial Advisor (Perth)