In this article we are going to discuss thinking mistakes when investing. We are all human and we make mistakes by default. But some human traits don’t mix well with investing. Here are 3 traits that can be a pitfall when you start investing. Get to know them so you can avoid these pitfalls.
Loss aversion.
Nobody likes to lose and the pain of a loss hits people twice as hard as the feeling of gain. So when stocks go down, it’s not surprising that the first reaction is to sell your positions, simply to avoid the pain of the loss. The problem with this is that these kinds of short-term decisions can adversely affect your portfolio in the long term.
What can you do?
Make sure you have a clear plan in advance and stick to it. Even when the stock market is down. You invest for the long term, so 10 or 15 years or maybe longer. Don’t lose sight of your goal and stick to your strategy.
Financial news usually focuses on the highs and lows of the market. Tension and sensation provide readers and viewers. But if the daily stock market news makes you restless, then feel free to switch off from time to time and take a news diet.
Self overestimation.
There are many overconfident investors. Some believe they can predict the movement of the entire market. Others rely on their instincts for a stock that will become big in the years to come. This sometimes prevents these overconfident investors from diversifying and trading more than desired.
What can you do?
Play devil’s advocate. Be critical of your own investment decisions.
And even if you have everything with you and your portfolio is very positive: don’t be on your high horse. Because to be honest with you: the market also consists of institutional investors, lightning-fast computers and many more parties who in all probability have more resources and knowledge than you. That’s not bad at all. But, resist the idea that you are smarter than the rest and remember: you really don’t have to beat the market to make a return.
Confirmation bias
Confirmation bias is our tendency to seek information that confirms our ideas and ignore information that proves otherwise. Doing research is crucial before investing. Always look at different angles and don’t just read the reports that underline your idea.
What can you do?
Suppose you have a stock in mind don’t just read praising reports about that stock, also look for reports and articles that have a negative opinion about the stock. Then critically weigh the pros and cons . Also remember that for every seller there is a buyer. So before buying, always ask yourself: why would the seller want to get rid of the stock?
