Do you tend to follow the herd when making investment decisions? When you look at all of your investment options, from RRSP vs TFSA, stocks vs bonds, etc., do you get stuck? Focusing too much on your return while paying less attention to fees? Even seasoned investors can fall prey to these errors in judgment.
That’s because (like all people) investors are not entirely rational. For instance, about 80 percent of people tend to think they make above-average investment decisions — which is mathematically impossible. We have biases. We pay too much attention to some things, and ignore other factors that should be high up on our radar.
Hey, everybody makes mistakes. The point is to learn from them. For instance, one error that’s particularly common: recency bias. As we noted then:
We see a line graph showing a steadily-rising return, like with the Nasdaq: well, why wouldn’t that trend continue? Because it can’t. Over time, as an asset rises in value, we can expect it to fall back down to the mean.
The market goes up. It goes down. Stocks representing individual companies rise and fall thanks to the leadership of their CEO (Elon Musk versus Travis Kalanick) and a million other variables. Oil goes up, gold goes down … and around and around we go.
The movement isn’t random. An experienced investor knows to look for clues that a given asset is undervalued. So remember that familiar warning you know about past performance. Act accordingly.
Sound familiar? Check out our full list here and see which mistake you might be making:
- 3 rookie mistakes that seasoned investors still make
- Even more rookie mistakes that seasoned investors make
We’re here to help
For a lot of investors, the way to avoid these kinds of ‘easy-to-see, hard-to-avoid’ problems is simple: use a financial adviser they trust. That’s why we offer unlimited, no-commission advice from a fiduciary who works with your interests at heart. Sign up today