Investing in stock markets now? AVOID these 4 MISTAKES | Mana Blog... for all
May 17, 2012

1. Emotion trumps rational judgment: People hate to lose more than they like to win. This fear of regret causes investors to hold on to losers too long and sell winners too early. Investors tend to hold on to losing investments hoping that they will come back. The contrary is true with winning stocks. Fearing a downturn and wanting to lock in profits, investors will sell stocks or funds too early and miss out on future gains.

2. Investors tend to get overconfident: The majority of people think they are better than average at a variety of tasks, such as driving and investing. But by definition, a majority of people can't be above average. This unrealistic assessment of one's own investing prowess causes investors to overtrade and pay the resulting higher fees and taxes.

3. Myopia causes misallocation: Investors tend to view each investment in isolation rather than in aggregate. Trying to make every investment a winner can throw off the asset allocation. It can also lead an investor to chase hot stocks, trade excessively, and sell at the wrong time. If all of an investor's individual investments are up at the same time, they should be alarmed rather than proud. It's a sign that they may be under-diversified and taking on too much risk.

4. Aversion to saving: A few years back, in the United States, Professors Richard Thaler of the University of Chicago and Shlomo Benartzi of UCLA developed a behavioural finance programme called Save More Tomorrow, or SMarT. Under the SMarT program, workers allowed automatic deferral increases to their retirement plans each year at raise time. In a test run at one company, 78 per cent of those who were offered the plan joined, and 80 per cent of those stayed in the programme. Even more striking, the average savings rates for people in the SMarT program climbed from 3.5 per cent to 13.6 per cent in fewer than four years. So when workers didn't see the decrease in their paychecks, they didn't miss the money.

Using the information
Simply recognising bad behaviour can lead to success. Use online tools such as portfolio managers that can help identify unintended areas of concentration in your portfolio and avoid overlap amongst your fund and stock holdings.

Develop a trading strategy and stick with it to take emotion out of the equation. Or, better yet, take a long-term approach to your investments and don't look at them more than once or twice a year.

Remember that most people have average investing skills, so buy and hold a diversified portfolio of investments and control what you can. You can't control the returns from your investments, but you can affect the amount you pay in fees and taxes.

Don't look at your investments individually, but rather take your portfolio as a whole. Portfolio manager tools can help you organise and categorise your investments. Or consult a financial planner.

And finally, consistently put money away for retirement. The best thing you can do for your portfolio is give it time to grow.

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