All investors believe that they are objective, calm, and making well-informed choices. However, in reality, we often make unintended mistakes. These mistakes are not made out of carelessness and in fact, investors usually make the same mistakes over time. In today’s post, we will be cover three of the most common mistakes made by investors, its thought process, and how you can potentially avoid making them yourself.
Procrastination and Impulse
The decision to buy and sell is not always an easy one to make. The simplest reason is that market prices fluctuate almost every second hence, we might be paying or losing up to hundreds of dollars for every cent (fraction of a cent) difference. That said, sometimes we might be thrown off if the price fluctuates in an erratic manner. In some cases, prices might continue to rise at a certain time in the day due to an increase in trade volumes. As such, investors might be tempted to buy and ride the rally however, these rallies usually are short-lived or are price traps. This is similar when prices are dropping and investors wait at the screen to get the best price possible only realizing that they have already missed it and eventually buying at a price caused by a hype. In essence, procrastination and impulsive decisions usually lead to higher prices or lower profits.
My suggestion to investors is to learn to accept that the endpoint is not about the price of entry nor does waiting a few minutes definitely warrant higher profits. The best decision is made before the market opens. Over time, this will always yield more consistent results for your investments.
Personal Bias
Some investors might have had positive views or experiences trading a particular stock or a sector in the market. As such, it is hard to prevent the urge to believe that the pattern observed before will happen again. Although these patterns might have some logic behind it it does not always pan out in an identical manner. Thus, investors who practice personal biases would sometimes be caught in a situation where the lows of the market are no longer the bottom as observed in the past months or even years. Such expected price movements might cause investors to be thrown off guard and occasionally, investors might exit and make a loss because they have landed in unknown price territory.
My suggestion is to always review your stocks and treat each new position as it is with the latest information rather than past experience. This will help prepare you for unpicked price movements and better plan responses when it happens.
Overly uneven diversification
In this blog as well as many other investment tips, we keep revisiting the ideas of dollar-cost averaging (DCA). Truth be told is that DCA will usually lead to an overly weighted position in an investor’s portfolio. That because investors who have started accumulating a particular stock might have been trying to spot the bottom. While it is possible for us DCA to reduce the average price of your position, it is always possible for your stock to be performing way poorer than expected. As such, it would not only result in a higher paper loss, it will also cause your portfolio to have an uneven proportion of a certain stock or sector. As a result, you might run of capital to DCA or even buy other stocks.
My suggestion is to always limit how much stocks you can accumulate for a particular sector or counter. No doubt it might eventually a “good” decision but it might sometimes become too much of a gamble to continue buying when prices are still falling. Therefore, always consider diversifying rather than blindly accumulating and be trapped if a counter ends up in an L-shaped trajectory.
Closing Thoughts
Experienced or not, investors are at the mercy of price fluctuations and personal inaccuracies at times. Therefore, an investor’s strategy should never be based on “luck” or making guesses. Instead, always ground yourself and be prepared to pay more or earn less when buying or selling. The purpose of being decisive is to train the discipline required to manage a larger amount of funds as your capital continues to grow and when you have more counters to monitor.
