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Investing Mistake #3: Behavior Errors

The idea for my new book Ditch the Guesswork: Creating Reliable ROI for Time-Starved Investors“(available from Amazon.com) came from creating a list of the most common investing mistakes we see investors make. Today’s post covers the third of three broad categories of investing mistakes many investors make – behavior errors.

Investor behavior follows one of two emotions: fear or greed.  When an investor is feeling greedy, she or he takes all sorts of actions that are counter to investment success. Actions like speculating instead of investing, taking a short-term view instead of a long-term view, following the herd, and my favorite, trying to guess the future. When an investor is fearful, she or he sells instead of holds investments or sits on too much cash.

The cost to investors for following their emotions and taking these actions is high: about 5%/year reduced return.  What can an investor do to avoid investment behavior mistakes? I recommend five things:

  1. Educate yourself about how investment markets work. Read a good book like “Ditch the Guesswork” and other books by Bogle, Schultheis, Bernstein and Swedroe. Nothing like a little knowledge to crowd out emotions.
  2. Take a long-term view. If you need the money in the next five years, it should be in cash.
  3. Ignore the Wall Street money hype and their slimy cousins the financial media. Don’t watch the financial news channels, don’t read the popular investing magazines, don’t read investment blogs and don’t subscribe to any investment newsletters.
  4. Create an investment plan that you understand. The old adage about buyer beware is very true.
  5. If you’re using a financial advisor, make sure she or he is a fiduciary so the person is acting in your best interest.

Oh, and one more thing, if you feel tempted to take a sudden action like to buy a stock or sell a security, wait another day before taking that action. Usually, the feeling will pass and with perspective you can avoid making a mistake.

I wrote “Ditch the Guesswork” to try to help investors avoid the most common investment mistakes we see all too frequently. I hope you order a copy and learn the simple lessons I try to teach in the book. If you want to sample the book, you can get the first two chapters for free at this link.

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