Behavioral Finance and Investor Mistakes

Investor Mistakes

This is from Morgan Housel’s article in this weekend’s WSJ NINE MISTAKES INVESTORS MAKE.

  1. FEELING CERTAIN – the future in the market revolves around probabilities not certainties.
  2. EXTRAPOLATING THE RECENT PAST INTO THE FUTURE – the easiest and most common forecast is to assume the future will resemble the recent past – check this out the next time you come across a prediction for the future, particular with regard to the market or the economy.
  3. PEOPLE SELLING FINANCIAL PRODUCTS ON COMMISSION – Keep this in mind “Never ask a barber if you need a haircut”!
  4. FEELING SMARTER AFTER THE MARKET RISES – Virtually everyone who stayed invested in the stock market the last few years has done well – were you smart or just in the right place at the right time?
  5. FEELING VICTIMIZED AFTER THE MARKET DROPS – Rather than blame the market or someone, recognize that downs are just as much a part of the market as ups.
  6. IMPATIENCE -Investing requires patience and discipline. Trying to beat the market or get ahead of it is not a likely recipe for long term success.
  7. LETTING PARTISAN VIEWS GUIDE YOUR INVESTMENT DECISIONS – Long term corporate earnings drive the market not the two year election cycle.
  8. WORRYING ABOUT THINGS YOU CAN’T CONTROL – Put your energy and effort into things you CAN control: return expectations, asset allocation, investment costs, etc.
  9. REFUSING TO CHANGE YOUR MIND WHEN THE FACTS CHANGE – Confidence and consistency are obviously good characteristics, but humility and open-mindedness are also good. Sometimes “I don’t know” and a changed forecast as more data is available are the right thing to do.

This is not an exhaustive list, but these nine things are good ones to keep in mind as you make and follow your investment decisions.