This time I asked: What is the biggest mistake investor’s make?
MANAGING THEIR OWN BEHAVIORS
Not knowing their own strengths and weaknesses. I don’t think there’s a perfect investment recipe for every single individual or organization, so understanding who you are, what your philosophy is and why you’re investing in the first place is a crucial step that many investors overlook.
Focusing on ‘the market’ as opposed to almost everything else in your financial life. Compared to predicting what will happen in markets, you have tremendous leverage over how much you earn, spend and save, what accounts you use to do it, and how much it costs you in fees and taxes. More people should know about dependent care FSAs than CAPE ratios. Before you put time into trying to beat the market, make sure the entire rest of your financial house is in order.
Giving too much weight to the present and not enough to the future. The simple (but certainly not easy) solution of focusing on the long-term would solve many financial mistakes (e.g., not saving enough, performance chasing, acting with fear and greed, etc.).
Judging everything on performance. Which mutual fund to buy? Past performance. Do I have a good advisor? Recent performance. Do I have the right asset allocation? Performance. Should I “factor tilt” or use momentum strategies? Performance. Imagine a world where you had to make all of these decisions – investment selection, advisor selection, allocation decisions, investment strategy, etc, and you had ZERO performance information about any of them. Then you’d be forced to rely on other (more useful) information like fees and taxes and behavior and smart planning and what fits well with your personality. You would make infinitely better decisions.
Paying too much attention to the news of the day and not enough attention to history. Reading too many articles and not enough books. I’m guilty myself sometimes. This is a killer.
The most common and biggest mistake that the average investor makes is believing they can time the market. They fail to realize that they have to be right not once, but twice; the exit and the re-entry. And how many times are they going to get this right over the course of their lifetime? The idea that successful investors avoid bear markets is just not true. Charlie Munger has gotten cut in half three times and has done alright for himself.
Trying to run a marathon in an hour. Market returns accrue over long periods of time and most of the investment business is an attempt to squeeze them into shorter periods, usually at the cost of puking at mile five.
Making too many decisions. Too often investors confuse interesting with actionable and action with results. When you feel the urge to trade or make a change to your portfolio, wait a few weeks and see if you feel the same way.
They take on more risk than they are able to handle. This may be at the prompting of advisors or at those investors looking over their shoulders. This can lead to a whole range of issues including those that see investors jumping from strategy to strategy.
Bouncing from one investment program to the next. Identify a robust evidence-based process with the appropriate diversification. Stick to it no matter what.