Money secret No. 27: Avoid common investment mistakes
Feelings and biases can have a strong influence on investing. That’s why it’s important to know the common mistakes investors make – so you can avoid them yourself. There’s a whole host of research findings addressing bad financial behaviors. Here are three of the main mistakes:
1. Overconfidence: This is when we think we know more than we actually do. We’re simply too self-assured in our abilities. For example, we think we can better predict the course of the markets over time or choose stocks better than the experts. So, beware of overconfidence. That being said, there is research showing that men are more prone to overconfidence than women.
2. Confirmation bias: This refers to the idea that we tend to look for information that validates what we already believed and also to ignore information that contradicts our beliefs. Make sure not to be on the hunt for information you already have, instead consciously seeking out knowledge that contradicts what you currently think, so that you have a balanced viewpoint. This is especially true if you’re contemplating making new financial investments.
3. Loss aversion: People find the pain of a loss to be almost twice as strong as the joy from an equally high gain, and it lingers for much longer. One of the ways this shows up in investing is that people will constantly check their portfolio. As soon as they see stock prices falling, they get scared. But when you invest long term with a broadly diversified portfolio, you shouldn’t focus on the short term. Then you can really enjoy the returns of a long-term investment.
Money secret No. 27: Are you overconfident, or do you check your portfolio too often? Figure out which investment mistake you’re more likely to make…and do everything you can to avoid it!