15 November 2024

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The 5 Mistakes to Avoid When Investing

Luigi Campopiano

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Here’s what you should never do with your savings:

1. Ignoring Your Time Horizon: The main goal for many investors is not to lose money, but they often overlook the time period over which they hope to achieve this. During crisis periods, many investors tend to "shorten" their time horizon (e.g., selling stocks and holding short-term bonds), even though the structure of their liabilities remains the same with long-term characteristics. When fear subsides and optimism returns to the markets, the opposite phenomenon occurs (with the same long-term liabilities). Therefore, each saver should try to match their investments to their own time horizon, as each horizon has its own strategy.
2. Changing Risk Tolerance Every Time the Market Fluctuates: When markets rise, many investors feel they can tolerate more risk, and when they fall, they want to reduce uncertainty. Letting your risk tolerance change according to market moods is a surefire way to endanger your assets. If you’re scared when everyone else is scared and euphoric when everyone is euphoric, you’ll end up selling at the lows and buying at the highs (which does not lead to satisfactory long-term returns). Many factors influence your risk tolerance, but it’s essential to be aware of your emotions. Emotional needs change quickly, while financial needs remain relatively constant. Don’t let the former outweigh the latter.
3. Taking Advice from People You Don’t Know (and Who Don’t Know You): Many people like exchanging investment tips with friends and colleagues or taking ideas from what they read in newspapers or online. This can work only if your situation is exactly the same as others, but it can be very risky if your goals, constraints, and risk tolerance differ. People offering advice in newspapers, on TV, or on the internet have no idea who you are or what you want to achieve. Gathering information from multiple sources and hearing various perspectives—even if they don’t always agree—is a great starting point. But you should always consider the source of the advice and never take at face value the suggestions of someone who doesn’t know you. Every investment decision should be personalized.
4. Overestimating Your Knowledge of the Markets and Ability to Predict: Many investors believe they have a crystal ball regarding what will happen in the financial markets. In reality, even correct predictions are often due to luck. In investing, it’s frustrating not to know everything, but it’s far worse to believe you know exactly what will happen. No one can predict market movements, and in any uncertain situation, thinking you know the outcome is much riskier than acknowledging the unpredictability of financial markets. Every decision should incorporate the possible consequences of being wrong. The quality of our decisions is what matters, as the consequences of a given choice are more important than the odds of an outcome occurring.
5. Neglecting Proper Diversification: Underestimating or forgetting about portfolio diversification is a mistake. Putting everything into a single asset class or a single issuer is an error that has often come at a high cost for many.