Making mistakes in investing is something that happens to everyone, whether you’re just starting or you’ve been doing it for a while. It’s alright, as long as these mistakes help us learn and avoid them in the future. But there comes a point in advanced investing when you have a lot of money on the line, and even a small mistake can have big consequences. In this special article, discover the ten investing mistakes that even experienced investors sometimes make.
The Context
Avoiding basic mistakes is one of the biggest challenges in becoming a successful investor — PlanB
After covering the most common investing errors made by novice and intermediate investors in our earlier list entries, it’s time to shed light on some flaws that even experienced investors are prone to make.
As we gain more experience in the market, we tend to become overconfident and complacent in our approach, assuming that nothing could possibly go wrong. However, the truth is that most costly investing mistakes are made in the progressive phase of investing.
In this article, we will discuss the top 10 advanced investing mistakes to avoid, highlighting the importance of learning from the experiences of others and the potential costs of the trial-and-error method.
1. Emotional Investing
The initial mistake many seasoned investors make is letting their emotions take control of their investment decisions. Although emotions are a fundamental aspect of human nature, they can hinder our rational thinking, especially in complex decision-making situations like investing.
To be successful in investing, it is important to separate emotions from investment decisions and focus on making rational choices.
Building confidence and developing the right temperament are key factors in making informed investment decisions.
2. Disregarding Liquidity
At number two on the list of the “top ten advanced” investing mistakes is a lack of understanding regarding liquidity, which is critical in managing your portfolio’s risk-return trade-offs.
Liquidity refers to accessibility to your investments, and liquid assets are those that can be easily converted into cash at fair prices without incurring significant losses in market value.
It is important to maintain approximately 60 to 65 percent of your portfolio in liquid assets to manage risks.
3. Getting Perplexed in a Bull Market
On our list of top-10 advanced investing mistakes, the third one is related to the confusion that investors may face.
The sudden onset of intermittent bull markets can be compared to a headache. Everyone starts acting like an expert when stock prices rise, and excitement takes over, causing an infinite number of optimistic melodies to be created.
During these frenzies, the biggest mistake an investor can make is to ignore risk management protocols and lose control.
Investors in these situations may exhibit herd mentality, ignore investment fundamentals, fixate on price points, and anticipate perpetual bullishness.
It is important to maintain composure, adhere to investment philosophy, and avoid hurriedly exiting profitable holdings or purchasing at a premium out of urgency. Remember the quote from John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
4. Reacting To Media
Ranked fourth on our list of top ten advanced investing mistakes is the media frenzy.
As per Newton’s third law, for every action, there’s an equal and opposite reaction, plus a media overreaction. Financial journalists are typically general journalists who have shifted their focus to finance-related topics.
During times of market turmoil, the media tends to exaggerate events to achieve their objectives. Their fundamental commercial objectives, such as viewership and subscriptions, are linked to your attention.
The media may criticize you for not taking advantage of the latest investment opportunity in town, but it’s up to you how you react to their provocations.
It is critical not to allow the media to influence your investment decisions.
5. Not Reviewing Investments
The tendency for forgetfulness is the fifth advanced investing mistake on our list. Investing can become monotonous, which may lead to neglect. In essence, investing is akin to planting a tree that requires constant care and attention, or it will wither and die.
If you fail to keep track of your investments, you are likely to lose money. If you are not one of those compulsive individuals who check their portfolio constantly (which is common among new investors and eventually fades), make it a habit to review your investments at least once every three months to look for important action signals.
It is also advisable to conduct an annual rebalancing audit to reduce investment downside risk.
As Charlie Munger said, many of life’s mistakes are caused by forgetting what one is attempting to accomplish.
6. Waiting To Get Even
One of the most common mistakes made in advanced investing is related to a pervasive human bias that goes by many names.
This bias is often referred to as the “Sunk Cost Fallacy,” “Break Even Fallacy,” or “Concorde Fallacy.” This harmful tendency arises when an investor becomes strongly attached to a losing investment, even after investing significant time, effort, and money into it.
Rather than accepting the loss and moving on, the investor believes it is important to “stick it out” and remain committed to the investment until its price returns to break-even levels. However, it is okay to make mistakes and lose some battles.
When in doubt, it is better to be flexible and make a quick exit instead of trying to hold on to a failing investment. It is important to use your resources wisely and remember that money represents the value of time.
7. Expecting Too Much From A Stock
The message states that investing in ULTA BEAUTY (#ULTA) in 2009 would have resulted in a +1,500% return with dividends reinvested by 2021.
Such claims are commonplace on social media, but they are of little use to average investors. In reality, no retail investor would risk all their basic necessities, such as food, shelter, transportation, and lifestyle, on a single company to achieve financial independence.
This would be impractical for anyone, and the ULTA BEAUTY claim is unrealistic and ambiguous. People who spread such doomsday-oriented tales intentionally omit the full picture, disregarding statements such as: “If you had invested in TRANSOCEAN (#RIG) in 2009 (the same year), by 2021, you would have lost 95% of your invested capital.”
Gains and losses are the trade-offs of a well-diversified stock portfolio.
If you can generate decent post-tax and inflation-adjusted returns that are higher than standard fixed-income instruments, you are already doing well. Don’t select your investments with the expectation of preposterously high returns; instead, adopt a balanced and diversified approach that has the potential to compound consistently.
8. Falling In Love With A Corporation
If you own a certain stock or investment that has provided you with significant returns in the past, it doesn’t necessarily imply that you should continue to purchase it and average it down over time.
In case your preferred stock starts to underperform frequently, you may need to reconsider your analysis and re-evaluate your decision. Always be prepared to sell your holdings or book your profits whenever it is sensible to do so.
Bear in mind that investing is aimed at generating consistent profits, and being emotionally attached to your investments will only result in financial loss. It’s essential to avoid getting too attached to your investments.
9. Daydreaming An Early Retirement
FIRE can backfire!
These days, quite a few investors appear to be yearning for early retirement without much basis, and they’re labeling it as ‘Financial Independence and Retiring Early,’ often abbreviated as F.I.R.E.
The trend of retiring early is quickly gaining popularity, but bad timing can result in savings being depleted sooner than expected, which can be disastrous. The majority of individuals do not genuinely seek retirement because it would mean giving up their life’s purpose.
In reality, no one wants to retire early; it is essentially a safety net against financial risks associated with occupations that have a short lifespan, such as athletes, surgeons, actors, models, and IT specialists, among others.
Retirement is a mental state, and if you are unhappy while working, you will likely still be unhappy after retiring. To achieve success in this endeavor, it is important to have a clear vision and purpose for post-retirement life, in addition to ensuring your financial security.
Otherwise, it is best to stay calm and continue working with passion.
10. Impatience
Investing is commonly associated with deferred gratification, a trait that not everyone possesses. Charlie Munger stated that those without this trait must work hard to develop it. Unfortunately, some experienced investors purchase stocks with unrealistic expectations of immediate gains.
However, it’s important to remember that businesses require time to grow, and expecting fast results can lead to hasty actions that may have negative consequences. A respectable capital gain and dividend return take at least three years to show their compounding power, assuming you follow the principles of dividend reinvestment.
Impatience can put your entire portfolio at risk, so it’s crucial to remain patient and not get upset while waiting for results. True champions in the world of investing possess the ability to wait without becoming impatient or upset.
11. Forgetting about Taxes & Inflation (Bonus)
Failing to consider taxes and inflation can be one of the biggest investing mistakes you make. These two factors continually erode the value of your money, making it crucial to ensure that your assets provide returns that outpace the negative impact.
To help mitigate this risk, here are 10 legal tips to consider:
☑ Avoid booking profits unnecessarily to defer tax implications
☑ Invest in tax-preferred instruments
☑ Stay away from low-interest bank accounts
☑ Invest in high-quality stocks
☑ Consider inflation-indexed bonds
☑ Offset short-term capital gains against losses
☑ Limit portfolio rebalancing
☑ Engage in charitable giving
☑ Reduce your lifestyle expenses (only if necessary)
☑ Pay taxes when required (only if necessary)
Investments that are heavily taxed or fail to keep pace with inflation can lead to unexpected negative returns. Always keep taxes and inflation in mind when making investment decisions.
12. Making an early decision to start day trading (Bonus)
Handling a scalpel without proper training can be dangerous. Therefore, medical students are required to do clerkships to observe and participate in procedures before becoming a surgeon.
Likewise, trading in the market requires expertise and knowledge, similar to performing surgery in real time. It is usually the final chapter in the growth life cycle of a wise investor.
Trading is an intriguing craft that depends on the “greater fool theory,” and it requires discipline and a comprehensive understanding of market psychology. Novice investors who attempt to join the bandwagon unprepared often face disastrous outcomes.
Trading induces anxiety and a rush, leading the brain to release both pleasure-promoting dopamine and stress-promoting cortisol simultaneously. It is tough to manage such intense feelings for an extended period.
Hence, it’s crucial to have prior experience before starting to trade. Value investing, on the other hand, is an excellent strategy to build wealth if you lack experience. Remember, handling money in the market is not a game. It requires skill, knowledge, and experience.
Frequently Asked Questions (FAQs)
1. How can I prevent emotions from influencing my investment decisions?
Emotions can cloud judgment in investing. To avoid this, focus on rational choices rather than emotional reactions. Building confidence and maintaining a disciplined approach can help in making informed decisions.
2. Why is liquidity important in managing investment portfolios?
Liquidity ensures accessibility to investments, allowing for quick conversion into cash without significant losses. Maintaining a portion of your portfolio in liquid assets helps manage risks effectively.
3. How should investors navigate bull markets to avoid mistakes?
During bull markets, investors may face confusion and temptations. It’s essential to maintain composure, adhere to investment principles, and avoid making impulsive decisions driven by market optimism.
4. How can investors avoid being influenced by media hype in their investment decisions?
Media sensationalism can lead to biased investment decisions. To avoid this, investors should focus on objective analysis and avoid making decisions based solely on media narratives.
5. Why is it important to regularly review investments?
Neglecting to review investments can lead to missed opportunities and losses. Regular monitoring helps investors stay informed and make necessary adjustments to their portfolios to mitigate risks and maximize returns.
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2 Comments
Nice conclusion, quite detailed.
Thank you for encouraging our team Adarsh 🪁