Common Investing Mistakes
Recognizing common behavioral mistakes can make a world of difference in your portfolio's performance. Here are three issues that often trip up investors and how to navigate them.
1. Performance Chasing: The temptation to pick funds or stocks based on recent performance is enticing. However, history shows that top-performing funds rarely sustain their success over the long term. Out of 549 U.S. stock funds, less than 3% remained in the top-quartile of performance after four years.
Tip: "Past performance is no guarantee of future returns." When considering an investment, look beyond short-term success. Evaluate factors such as investment objectives, fees, and taxes.
2. Hindsight Bias: The "I should have seen that coming" mindset is common, leading to "herding" behavior where investors pile into trendy picks. However, chasing investment fads can result in terrible outcomes, as witnessed during the crash of crypto and NFTs.
Tip: Predicting the future is a futile endeavor. Successful long-term investors build a plan and stick to it, avoiding the allure of short-lived trends and fads.
3. Loss Aversion: Our brains are wired to avoid danger, which makes us feel investment losses more than gains. Reacting to short-term market events usually leads to bad outcomes. Stay invested and disciplined.
Tip: Focus on time in the market, not on timing the market. Create a diversified portfolio, a long term plan, and focus your effort on things you can actually control.
Remember, there's no quick fix to changing human nature, but being aware of these pitfalls can help you steer clear of costly mistakes and potentially enhance your portfolio's performance.
