When it comes to investing, we like to think most of our moves are purely rational ones. Made with a clear mind and of the upmost logic! But this couldn’t be farther from the truth. Most of our investment decisions (as well as all the buying and selling) are actually dominated by our emotions and we might not even be fully aware of this!
We’re cool, complex creatures and despite economists thinking (more like praying then pretending) that we humans make decisions that are 100% rational and maximise our utility, we’re just not like that. We often let our emotions get the better of us, become too attached to our investments, follow the crowd and so on. All in all, we’re perfectly imperfect. And so are our investment decisions.
The first step to doing is knowing what went wrong in the first place. So here are some of the most common behaviours that can land your portfolio into trouble. But don’t worry, we’re all a working progress and luckily there are things you can do to stop you from falling into these traps!
#1 Following The Crowd
We’re human. We like to do what others are doing and even if we don’t, there’s a comfort of sorts in following the masses. Especially when it comes to investing! There’s nothing worse and more testing than swimming in investment waters, alone. Trust me. It makes you second-guess yourself and feel like a darn idiot. After all, if no one doing’s it then we think it must surely be the wrong move.
But let me tell you this: following what the crowd blindly means that you’ll have little to no conviction and this is bad cause when things turns sour (aka stock prices start to tumble) which has been the case ever since this miserable year began, you’re gonna find it 100x harder to hold course. If you’re owning things simply because others are, the chances of you selling when markets tumble will be pretty high. Too high.
Crypto, to me, seems like the perfect example of this. On the one hand, you’ve got a ton of super smart people who see Bitcoin as fundamentally shaping our entire monetary system as we know it. Then at the same time you’ve got a whole load of folk who are jumping on it simply because everyone else is or was. It seems to be a place where you can get-rich-quick (and lose it just as quick btw!) hence all this excitement. Though with the recent collapse of the FTX exchange, I bet the mood has turned sour.
For those of you who own cyrpto, I’m sure you have a thesis and a reason for doing so which will definitely bulk up your conviction and will mean you’re more likely to hold on when prices take large downturns but if you’re in the camp who own it because it’s cool and think it’ll make you millions overnight, you’ll be the ones selling on the down. Turning you paper losses into actual ones.
So make sure that you’re not investing in things simply because everyone else is, set out your investment goals and this will determine your time horizon. The longer you have to invest (as a rule of thumb this should be at least 5 years) the more risk you’ll be able to take on. But if you don’t have that kind of time, best to stay away.
But it’s not just that. If certain levels of risk (aka large price swings) makes you feel a little bit sick then you probably shouldn’t be investing in those areas. More risk = more reward but only risk what you’re willing to lose. If you risk more than that, you’ll most likely end up selling on the lows. And that’ll hurt so bad.
#2 Falling In Love
Wait, what?! Boom. I caught your attention. What I meant to say is that it’s dangerous to fall in love with your investments. Try as much as you can not to do that. See, when you invest into something from stocks to crypto, you want to remain objective. Why is this so important? Well, the more objective you are, the more you’ll be able to see things for what they really are rather that what you wish for them to be. And that’s precisely where the danger lies.
When we buy a stock we are buying a teeny tiny part of a company. And that ownership (whether you realise it or not) tends to give us some feeling of, yes – ownership! Almost as though part of that company actually belongs to us. And when we own stuff, we place a way higher value on them than other (non-owners) would.
And we have a habit of over-valuing things we own (ahem, the stocks that sit in our portfolio) which means we’re less likely to sell them when they’ve run into serious trouble. Trouble that would warrant a big fat sell. But when we own stocks, we get attached. We find it hard to a) value it appropriately, b) look at new info with clear eyes and c) realise when it’s time to sell. They’re all as equally damaging as the other but it’s the last one that really seals the deal.
So guys, as tempting as it is, do your best not to fall in love with your investments! Realise they’re mere mortals (just like the rest of us) and that things can turn sour at any moment. The key is to zoom out and see the bigger picture. Rather than focussing on all the good things of a company, and totally ignoring the things that aren’t as good, do the opposite.
Or at least have a healthy balance of the two! Because when we buy a stock, all we see are the good things and even when something appears to be less-than-swell, we find ourselves making excuses. Much like real life, hey! So be logical, realistic and have a healthy dose of scepticism. That’s it. That’s the tough love chat.
#3 Failing To Hold On
We have a habit of selling our winners too soon while clinging to our losers for dear life. But while most people focus on the latter as being the super bad one, selling profits too early is just as bad. If not worse. Profits (those lovely wins) make us feel good. And cashing in on these bad boys feels even better.
But lemme ask you this: if a stock is going up and up, why stunt its growth? If we’re really after that magical compounding of returns, that’ll only happen when you actually hold onto that stuff, till infinity and beyond, why risk selling too early and screw it all up.
Another problem we have with holding on is that of our stocks/funds that have seriously gone down in value. And this year, most of us have lost a lot on our funds. 2022 has been a rally nasty year.
But our attitude towards losses is what gets us into trouble. We hate the thought (and sheer sight) of us losing. It means we’ve gotta admit we were wrong. That we made a mistake. This can be awkward at best and embarrassing at worst. But either way it’s not a treat. We’re also afraid of losing money. Not just because of the admission of errors that comes along with it but because it’s downright uncomfortable to lose. But if we don’t lose, we’ll never win. Losing is a sign you’re trying. It’s a sign you’re investing.
So let’s start to become even just a little more comfy with our losses and accept that it’s natural and part and parcel of investing. Cause if you’re able to do this, you’ll be a winner already .
So there ye have it. We humans are messy, funny and do all sorts of things that we know to be totally irrational yet do it anyway. Don’t be so hard on yourself. Focus on becoming a better investor, starting with 1% each day and your efforts will compound.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
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