The three most common investor mistakes (and how to fix them)

Bad habits can make for a stressed investor, here's how to avoid them.
The three most common investor mistakes (and how to fix them)
November 24, 2022

Table of contents

Investing should be fairly boring.

Setting up your asset mix, regularly adding to the blend over the long-term and revisiting that balance every year doesn’t exactly sound like a high-octane journey.

If the whole thing is becoming a day-to-day activity fuelled by emotion, or you find yourself getting excited, nervous or impulsive, then it’s time to regroup.

But that’s easier said than done. All corners of the behavioural economics world agree we’re not good at making decisions under pressure. Throw the added weights of money and life goals into the mix and the likelihood that we’ll let our hearts rule our heads gets even greater.

Read more: Need some help? We’re here for you

Here are three tell-tale signs you might need to take a step back and look at whether you’re actually helping your portfolio, or if you’re doing more harm than good.

Mistake #1: trading too often

We often think action breeds results, as if the most successful investors are the ones that trade the most. 

It’s just not true. 

After the financial crisis, Finsbury Growth & Income manager Nick Train was pretty much flavour of the decade in the UK, and he didn’t buy a single new share from 2011 until 2015. 

Train isn’t the only one with a strong commitment to ‘buy and hold’, though. And while that strategy doesn’t mean stubbornly hanging onto everything you buy, it does mean you need to be disciplined enough to avoid jumping in and out of the market constantly.

Read more:
Freetrade’s 10 (+1) principles for good investing
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Behave yourself: the gambler’s fallacy

Like a good carpenter will know, it’s the prior research and measuring that should take the bulk of the effort. Once you’ve actually bought your asset, unless the big picture has drastically changed you just need to leave your investment alone. In that sense, the value lies in self-restraint, not extra action. 

Don’t just do something, sit there.

Overtrading? Try this

If you’re trading furiously throughout the day, chopping down positions as soon as they get in the green, or putting through a huge number of buys in quick succession, ask yourself why you’re doing it.

Do you really have the long term in mind or are you getting sucked into short-termism? Over the long haul, those repeated actions aren’t likely to help towards the ultimate goal of sharing in a truly valuable company’s wealth creation.

Instead, why not think about setting up a recurring order that will drip-feed your money into the market at regular intervals, say once a month after you get paid? You’ll still be employing a pound-cost averaging strategy and won’t be tempted to overtrade as it’s all happening in the background without you having to log in.

Read more: lump sum investing vs pound-cost averaging

If you’re really struggling to stay away from the buy button, it might be time for a pause. 

Freetrade’s trading break feature is useful for when you need a breather. It can give you the time and space to reassess your own behaviour and it’s a good tool to have in your back pocket if you know you are likely to trade too often. Getting ahead of that happening is half the battle.

Mistake #2: letting emotion take over

Economist, and investor favourite, Daniel Kahneman says our brains constantly have two systems to choose from when we have a decision to make. System one offers rapid, instinctive, animal instinct. System two is more thoughtful, considered and altogether less frantic.

We’re often quick to spot that the second system is better for us but we know exactly which one our minds prefer. 

The difficulty with allowing these types of rash, system one decisions to run our portfolios is that we’re letting emotion in, not reason.

That can mean fear-fuelled buying of a stock that no longer offers growth potential, just because we think we’ll have failed if we sell up and move on. Stocks will always veer up and down but if the investment case for your holding just isn’t there anymore and you’re chasing the share down the page, it’s a sign ego has beaten research.

That also goes for repeatedly selling at a loss and buying back into the same asset when it recovers. You’re letting fear rule the sell button and FOMO govern the one labelled ‘buy’. The reality is we tend to rely on our feelings when we haven’t done enough research to fall back on when we get stressed.

Which leads us to how we can combat this sort of jumpy behaviour.

Tips to avoid emotional investing

Know what you own and know why you own it. Not our words, but rather the mantra of investing legend, Peter Lynch. And it makes complete sense.

Once you know how a company makes its money, where the opportunities are and what pitfalls might put its future in jeopardy, suddenly the decision-making gets a lot easier. When you buy, you’ll know what you expect from the company, and when you sell you’ll feel confident it was for the right reasons. No emotion, no jittery transactions, just fact-based action.

Prepare to get emotional too. Money really can cloud your judgement so before you start, set yourself some clear buy and sell criteria. What are the triggers that would make you want a share, and what would make you run a mile? Once a stock ticks either checklist, you’ll know exactly how a calmer version of yourself would ultimately act. 

It might even help to save any big decisions for a pre-booked check-up. A lot of people only look at their portfolios every six months to make sure the asset balance still suits their risk tolerance, and the companies are performing in line with what they’d expect. 

A structured approach like this means you’re starting from a position of organisation, rather than fear or greed.

Mistake #3: not managing risk

Risk is a very real part of investing but getting the wrong idea about it can mess up how we structure our portfolios.

It’s not about jumping into companies after seeing their name beside a rocket emoji on Reddit. When you find yourself hoping a share will shoot skyward without considering what will happen if it doesn’t, you might be gambling, not investing.

Read more: Investment risk explained

In this sense, you’re doing the stock market equivalent of closing your eyes just before you cross the road. That level of risk isn’t necessary, and there are much better ways to go about investing.

So, rather than taking a punt on a penny stock because you like the idea of it generating lottery winner-esque returns, manage your risk and plan for the long run.

Downsides happen, plan for them

That means you should have a range of assets in your portfolio that all react differently to what’s happening in the world. The best investors plan for a journey with both ups and downs and have the assets to swap leadership when needs be. History tells us that stocks, bonds, property, precious metals etc. all perform differently because the external forces on them are different.

Quite simply, having a blend of them means a hit to stocks won’t hurt your whole portfolio if that risk is spread out instead of concentrated on one lonesome share.

And even within your stock holdings, are they all likely to suffer if a sector falls out of fashion or a country goes into lockdown? Spreading risk across sectors and geographies helps reduce the impact of one big shock on a specific set of companies, and the knock-on effect on your portfolio.

In the end, a lot of the mistakes we make when we invest come down to too little research and too much excitement. And changing that balance is never a bad thing.

It’s hard to find a successful investor, with a repeatable process, that wishes they knew less about their investments or that they were more rash with their decisions. It’s also no surprise that those are the investors who happen to sleep better at night too.

Build your financial knowledge and be in a better position to grow your wealth. We offer a wide range of financial content and guides to help you get the insight you need. For example, learn how to invest in stocks if you are a beginner, how to make the most of your savings with ISA rules or how much you need to save for retirement

Important information

When you invest, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest.

Freetrade does not give investment advice and you are responsible for making your own investment decisions. If you are unsure about what is right for you, you should seek independent advice.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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