Many investors find themselves falling short of their goals, and often, it’s not because of a lack of knowledge or resources. Instead, it’s due to certain bad habits that hold them back. But don’t worry, there’s good news. By identifying and overcoming these habits, you can unlock your true investment potential and set yourself on a path to prosperity. This is how you can turn things around.
Understanding the Behavior Gap
Investors often underperform the funds they invest in, a phenomenon known as the ‘behavior gap’. This shortfall is largely due to bad habits, such as poorly timed purchases and sales of fund shares. In other words, many investors tend to buy most at the top and sell most at the bottom. This behavior gap is a crucial concept to understand, as it’s an area where financial advisors can add tremendous value, specifically in their efforts to shrink the gap.
Take the example of Peter Lynch, the former manager of Fidelity Magellan FMAGX. Despite returning 29% annually in the decade he managed the fund, the average investor in his fund only returned 7%. The difference? Human behavior.
The Pitfall of Excess Activity
In his book, ‘Money, Simplified’, Peter Mallouk, CEO of Creative Planning, highlights one area where investors often hurt themselves: excess activity. Investors who frequently check their investment statements and make changes more often tend to have poorer performance. On the contrary, those who check their statements once a year tend to have a better allocation of stocks and bonds, leading to better performance.
So, the key takeaway here is to avoid excess activity. Don’t let every market fluctuation dictate your investment decisions. Stay the course and stick to your long-term investment plan.
Don’t Mix Politics and Investments
Another common trap for investors is letting political turbulence inform investment decisions. It’s important to remember that the stock market has continued to rise over the years, regardless of who’s in office. So, it’s best to keep politics and investments separate. Don’t let the political climate dictate your investment strategy.
Avoiding the Fear of Missing Out (FOMO)
FOMO, or the fear of missing out, is another common pitfall for investors. It’s easy to get caught up in the hype of high-performing areas of the market, like technology stocks or cryptocurrencies. However, chasing trends can often lead to poor investment decisions. Remember, successful investing is about long-term strategy, not short-term trends.
Managing Emotions
Investing can be an emotional rollercoaster. It’s easy to get swept up in the excitement of rising prices or the fear of falling ones. However, managing your emotions is crucial to successful investing. Don’t let your feelings dictate your investment decisions. Stay rational and stick to your plan.
Good Habits Over Big News
Finally, remember that successful investing is more about good habits than reacting to big news items. It’s about making informed, rational decisions and sticking to your long-term investment strategy. So, focus on developing good habits, like regular investing, diversification, and long-term thinking, rather than trying to time the market or chase trends.
Bid Farewell to Bad Investment Habits
Investing can be a challenging journey, but by identifying and overcoming these bad habits, you can set yourself on a path to financial success. The key to successful investing isn’t about finding the next big thing or making quick decisions based on market fluctuations. It’s about developing good habits, staying the course, and making informed decisions. So, start breaking those bad habits today and unlock your true investment potential.