9 habits of highly ineffective investors

This is a summary of the article written by Shane Oliver. He mentions these are the common mistakes that most investors make.

1. Thinking that crowd support indicates safety: Individuals often feel safest when investing in an asset when their neighbours and friends are doing the same and media commentary is reinforcing the message that it’s the right thing to do. Call it “safety in numbers”. But it’s invariably doomed to failure. It turns out that the point of maximum opportunity is when the crowd is pessimistic and the point of maximum risk is when the crowd is euphoric, but unfortunately most don’t realise this because it involves going against the crowd and that’s uncomfortable.

2. Assuming current returns are a guide to the future: Because of difficulties in processing information investors adopt simplifying assumptions. One of these is that recent returns or the current state of the economy and investment markets are a guide to the future: so tough economic conditions and recent poor returns are expected to continue and vice versa for good returns and good economic conditions. The problem with this is that when its combined with the “safety in numbers” mistake it results in investors getting in at the wrong time (e.g. after an asset has already had strong gains) or getting out at the wrong time (e.g. when it is bottoming). In other words, buying when asset values are high and selling when they are low.

3. Believing strong growth is good for stocks & vice versa: This is generally true over the long term and at various points in the economic cycle, but at cyclical extremes, it is invariably wrong. The problem is that share markets are forward-looking, so when economic data is really strong – measured by strong economic growth, low unemployment, etc. – the market has already factored it in. In fact, the share market may then fret about rising costs, rising inflation and rising short term interest rates, and hence things are so good they start to become bad! History indicates that the best gains in stocks are usually made when the economic news is still poor, as stocks rebound from being undervalued and unloved. In other words, things are so bad they are actually good for investors.

This is a summary of the article written by Shane Oliver. He mentions these are the common mistakes that most investors make.

4. Relying on experts to tell you where the market is going: No one has a perfect crystal ball. It’s well-known that when the consensus of experts’ forecasts is compared to actual outcomes they are often out by a wide margin. Forecasts of investment and economic indicators are useful but they need to be treated with care. If forecasting investment markets were so easy then the forecasters would be rich and so would have stopped doing it. The key value of investment experts – or at least the good ones – is to give an understanding of the issues surrounding an investment market and to put things in context. The latter can provide valuable information in terms of understanding the potential for the market going forward.

5. Letting a strongly held view get in the way: Ned Davis rightly pointed out that the aim is to make money, not to be right. Many let their blind faith in a strongly held view drive their investment decisions. They could turn out to be right, but end up losing a lot of money in the interim. In fact, there is a big difference between being right and making money.

6. Looking at your investments too much: This sounds perverse – surely checking up on how your investments are doing is a good thing? A 1997 study by US behavioural economist Richard Thaler found investors “with the most data [about how their investment is performing] did the worst in terms of money earned”. The trick is to have patience (evidence shows that patient people make better investors because they can look beyond short-term noise or are less inclined to jump from investment to investment after they have already run) and turn down the noise.

This is the final part of an article written by Shane Oliver. He mentions these are the common mistakes that most investors make.

7. Making investing too complex: Given the increasing ease of access to investment options, various ways to assemble them and information and processes to assess and evaluate them investment complexity can become the norm. The trouble is that when you overcomplicate your investments it can mean that you can’t see the wood for the trees. You ignore that the key driver of your portfolio’s risk and return is how much you have in shares, bonds, real assets, cash, etc. You end up in investments you don’t even understand. Avoid clutter around your investments, don’t fret the small stuff, keep it simple and don’t invest in products you don’t understand.

8. Being too conservative early in life: Cash and bank deposits are low risk and fine for near term spending requirements and emergency funds but they won’t build wealth over long periods of time. Not having enough in growth assets can be a particular problem for investors early in their working career as it can make it much harder to adequately fund retirement later in life.

9. Trying to time the market: Without a tried and tested asset allocation process, trying to time the market (selling before falls and buying ahead of gains) is very difficult.
One way to overcome many of these mistakes is to have a long term investment plan that allows for your goals and risk tolerance and then sticking to it. (The big question is how many of us have a written long term investment plan)