Relying on common sense and market conventions are among the causes of a list of seven mistakes often made by investors, according to the investment house AMP Capital.
“In the upside-down world logic that applies to much of investing, there are … mistakes investors often make which make it harder for them to reach their financial goals,” Shane Oliver, head of investment strategy and chief economist at AMP Capital, said in a note.
Given how often rules of thumb are proven wrong by the markets, Oliver provided a list of the most common bad habits that he said investors should break.
Following the herd
In a classic case of safety in numbers, individuals feel assured investing in assets that everybody else likes. However, this course of action is doomed to failure, Oliver cautioned.
“When everyone is bullish and has bought into an asset with general euphoria about it, there is no one left to buy in the face of more positive supporting news but lots of people who can sell if the news turns sour,” Oliver explained.
Current returns will continue
An assumption often adopted by investors is that current returns and economic conditions are a guide for the future. As a result, regardless of whether times are good or bad, investors expect results to persist. In turn, this causes investors to get in and out of the markets at the wrong times, Oliver said in the note.
Strong growth is good for stocks
While this rhetoric generally holds true in the long term, it can fail when the markets are at cyclical extremes, Oliver said, noting that share markets are forward looking. So when current economic data is strong it may be the wrong time to buy. Historically, the best gains in stocks were made when economic conditions were poor, Oliver said.
Trusting the experts
Experts get things right but they also get things wrong. “The grander the forecast, the greater need for skepticism,” the note said, stating that the value-add coming from experts should be in providing investors with a better understanding of issues rather than making predictions.
Letting strong views get in the way
There’s a difference between being right and making money, Oliver said.
Looking too much
Checking one’s investments too many times can result in overexposure to market noise, which can cause investors to act in an irrational manner, the note said. The solution to this is to practise patience, which should allow investors to look beyond short term market movements.
Timing the market
“Without a tried and tested asset allocation process, trying to … sell before falls and buy ahead of gains is very difficult,” Oliver said in his note. Investors tend to hurt their own returns when they attempt to avoid the worst days in the markets as they either “get out after the bad returns have occurred (or get in) just in time to miss out on some of the best days,” he added.