It is often said that we learn best from our mistakes. Well, there is considerable truth in this but also bear in mind the painful and pricey lessons suffered when applied to your investing journey. Being a savvy investor is not just about having the most well-balanced portfolio. The true key to investment success is to first avoid making these three common behavioural mistakes.
As the world reeled from the shocks of the pandemic, the S&P 500 and the Nasdaq Composite both fell around 30% earlier this year1 before hitting new highs2 in record time. The stock market can be a highly volatile environment and it has been shown that market volatility is intricately linked to behavioural decisions driven by emotions.
Mistake #1: Trading Too Much
Vice chairman of Berkshire Hathaway, Charlie Munger, once said this, “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”
The art of “waiting” is indeed one more challenging than it seems. A truly disciplined investor looks beyond short-term concerns and focuses on market growth potential in the long run.
Mistake #2: Chasing Returns
This debatable practice involves excessive risk-taking and buying into what everyone else is buying. You are essentially making massive portfolio reallocation based solely on recent stock movement.
This idea may work; on the condition that you are a momentum trader with intentionally short holding periods. But if you intend to invest for the long term, chasing returns will likely bring about adverse effects on the overall performance of your portfolio.
Mistake #3: Staying All In Cash
With so much volatility in the market, it seems much safer to just sit tight on your money and peep in from the side-lines. Cash is king, but at the same time it can also be a depreciating asset
Achieving the right balance of cash can be a challenge, especially if you are not generating new income or savings to pump into your investment portfolio.
A heartfelt word of advice for newbie investors out there: Taking your own sweet time to get started is one of the most crucial investing mistakes you can make. In this quote often attributed to Albert Einstein, where he said
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Take it from Warren Buffett, who himself puts it this way.
“My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
All in all, it is always wise to keep your emotions in check and not let them get the better of you. Rule of thumb: If your decision to buy or sell cannot wait for a few days, you are probably making an emotional decision.
If you would like to review your investment portfolio for any possible missteps, I would be glad to jump in a discussion with you today!