Rules is rules for a reason
In investing it can seem like there are two schools. Two mindsets. Two camps if you will.
Over here there’s Camp Adrenaline and its whole lotta hype and hyperbole; its no-rules and live-for-todayism. Over there is boring old Camp Safety Pencil with its all discipline, structure and caution.
Mos def, camp one is the exciting-er place to pitch tent. It’s abandon-your-cares and prepare for high-highs. It’s deep forest waterparks, log rides and marshmallowy smells in the sparkling night sky. Sign me up, right?
Camp two’s all rules and principles. You pitch your tent to precise instructions, set expectations and settle in. Your camp counsellors are Diligence and Process.
The choice of camps seems a no-brainer, yet a collection of data — scraped from various sources and compiled by Visual Capitalist — offers a pretty solid list of the 20 Most Common Investing Mistakes …
And wouldn’t you know it, most errors spawn where the smell of the s’mores soars sweet.
Short termism costs
There’s a certain romance in investing around the idea of getting in and out quick with some extra pounds in-hand. But chasing quick wins, and all the baggage that comes with it, sits behind several of investing’s Most Common Mistakes.
See, short-term plays invariably require more active trading and transacting, and more reactive trading and transacting. Both are bad for business. This first shows in fees: active investors spend some 50% more in transaction costs compared to long-termers.
Then there’s performance. Data shows that the most active investors underperform the market by an average of 6.5%. Emotionally-driven investment decisions are also detrimental, dragging down performance by an average of 3% in the year.
Relatedly, chasing quick wins often means fixing on one or two risky stocks, yet only 21% of US stocks have outperformed the market since 1927. Hence Mistake #3: failing to diversify. In a game where ~80% lose then it makes sense to cover more ground.
Sweat the small stuff
Another handful of Common Mistakes can be filed under the heading sweat the small stuff. Although that said, the small stuff is actually pretty big stuff.
This small stuff / big stuff is mainly about tracking … or rather not tracking. Not tracking fees; not tracking the tax consequences; not tracking inflation. Not tracking goals, especially.
Losing sight of any of the above may significantly dent your margin but it is interesting that (as per Mistake #2) surprisingly few people actually set investment goals in the first place. There’s setting goals and there’s tracking goals and one needs the other: Mistake #9 says that many people with objectives don’t actually track how near (or not) they are to target.
It seems odd, but there it is. How do you gauge success if you don’t know what it looks like … or where you are in relation to it?
Clarity, vision, focus
As said, investing is a long game hence Mistake #14: there’s no timing the market there’s only time in the market.
Some Camp Adrenaline representatives might tell you that investing is sorcery; that some folks have the magic touch. Nope. In investing, some stocks will climb but some won’t so you buy a lot of the market and hope you’ll sweep up some winners.
That brings us to Mistake #1 on the list: the gap between expectations and reality. Data shows that the average individual investor expects 15.6% in annual returns, yet the professionals expect less than half of that, or 7% in annual returns.
We all know what happens when we expect A but get B. We react. We become more likely to chase riskier risks to make up the shortfall. See previous section – short-termism costs.
The control any individual has in investing is actually very limited. Cue the finale, then, and Mistake #20: failing to control the controllables. We can set goals, research, track and sweat the detail. This helps with clarity and mindset but really the market does the rest.
Another year at Camp Safety Pencil
To revisit our two campsites, and to pull the final tent-pegs out of this analogy, Camp Adrenaline is a bit like hedonism. It’s Ibiza. Woodstock. It’s appealing, magnetic, and a lot of fun, at first.
But one can’t stay there (and healthy) for long. Fairly soon you’ll max out on mistakes, emotion and marshmallows.
Camp Safety Pencil is different. It isn’t designed for thrills and adrenaline and excitement, it’s a custom-built campsite that provides the ideal conditions to invest with clarity and confidence. Sure there are rules and there’s discipline – but those are time-tested to help you live in contentment for longer. Con-TENT-ment? Pun intended … and regretted.