Does the below picture rings a bell?
A study on investor behavior commissioned by the US Securities and Exchange Commission found that investors tend to make the same mistakes time after time. The report of the study pointed out that many investors damage their portfolios by under-diversifying, trading frequently, following the herd, selling winning positions and holding on to losing positions. The study also pointed out overconfidence as the chief emotion leading to investment mistakes.
So here are the 4 common investment mistakes you should avoid:
- Overtrading: The study found that investors who trade frequently tend to underperform. There are two reasons for this. The first is overconfidence. They believe that they know the market inside and out and can turn anything they touch to gold. This is a dangerous thing as it can lead to irrational decisions. The second is increased fees due to trading. The more you trade, the more charges you incur that eats into your profits.
- The herd mentality: A lot of US investors lost a lot of money when the so called dot.com bubble burst in 2000 and then again when the US sub-prime housing market crashed in 2008. Many of these investors had listened to their ‘natural instinct’ to follow the herd when prices were rising at unprecedented rates, not realizing that what goes up rapidly can come crashing down equally fast. So, avoid the herd mentality. Instead, you may want to take the contrarian view and wait for a deep correction to enter the market.
- Momentum investing: Many traders look at the short-run momentum rather than the long-term trend to make quick profit. For example, you may look at the few days’ uptrend and buy the stock of a certain company thinking that the price would go further up, while the major trend may actually be a downtrend. Once the short upward moments loses steam, you will find yourself in big trouble. Avoid momentum investing. Focus on the news flow before investing and look at the big picture. Unless you are a great chartist or technical investor, it is good to invest long term by buying a great company stock at a good price.
- Selling at the wrong time: One big mistake investors often make is selling winning stocks while holding on to the losing ones. The reason they give is that they want to recoup the loss made by the loss-making stocks. But what usually happens afterwards is that the high performing stocks (which were sold) continue to perform well while the underperforming stocks (which are retained in the portfolio) continue to make losses. A sound reason to sell off a winning stock is when its price is too high to be justifiable; sell off a losing stock when you know you have made a mistake, the company’s future prospect is really bleak and irreversible or that you can have a much more significant upside in another stock.
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The author of this article, Mr Sean Ong is a Certified Life Coach, a Master Practitioner in Neuro-Linguistic Programming and a Chartered Financial Consultant who has been featured on the local TV and radio. Having begun his career in the finance industry since year 2002, he is currently leading a top-performing advisory group as a Senior Advisory Group Partner in IPPFA. In his efforts to contribute to the society, Sean ran 1,000 km over 87 days to successfully raise more than $13,000 for a children charity in year 2012. He also published a book subsequently where sales proceeds were donated to charity. Sean completed his Masters of Science Degree in Technopreneurship & Innovation in year 2020 and was honoured in the Director’s List for academic excellence. He has keen interests in InsurTech projects and mental wellness initiatives for the youths. Above all, Sean counts knowing Jesus Christ as the most significant event of his life. He can be contacted at email@example.com.