Strate­gies to over­come in­vest­ment mis­takes

Rec­og­nize com­mon er­rors and steps to cor­rect them

Albany Times Union - Sunday - - SUNDAY MONEY - By Anna-louise Jack­son Nerdwal­let ▶ ajack­[email protected]­

Look­ing for some­one to blame for the not-so-stel­lar per­for­mance of your in­vest­ment port­fo­lio? Try check­ing the mir­ror.

Com­mon ten­den­cies that make us our own worst en­e­mies when in­vest­ing in­clude: sell­ing win­ning in­vest­ments too soon or hold­ing onto losers for too long, load­ing up on too-sim­i­lar as­sets or fail­ing to as­sess the fu­ture im­pli­ca­tions of to­day’s de­ci­sions.

Re­searchers have found dozens of un­con­scious bi­ases that can drive peo­ple to make money de­ci­sions they later re­gret. Th­ese be­hav­ioral eco­nom­ics con­cepts in­clude things like “an­chor­ing” — when a spe­cific and per­haps ar­bi­trary num­ber you have in mind sways your de­ci­sion-mak­ing, such as sell­ing Ap­ple just be­cause the com­pany’s stock hit a round num­ber, like $200 a share. Or, the “en­dow­ment ef­fect” can cause you to over­value some­thing sim­ply be­cause you own it, lead­ing you to cling to a stock that’s tank­ing.

Here are some com­mon hu­man er­rors in in­vest­ing, with strate­gies to over­come them.

Pur­su­ing past predilec­tions

Fi­nan­cial in­sti­tu­tions re­mind us that past per­for­mance doesn’t guar­an­tee fu­ture re­sults. We don’t al­ways lis­ten.

It’s tempt­ing to look at a stock’s (or the broader market’s) re­cent per­for­mance and con­clude gains will per­sist in the near term, said Vic­tor Ric­cia­rdi, a fi­nance pro­fes­sor at Goucher Col­lege and co-ed­i­tor of the books “In­vestor Be­hav­ior” and “Fi­nan­cial Be­hav­ior.” “Peo­ple take a very small sam­ple of data and draw a ma­jor con­clu­sion, and that’s a pretty bad pit­fall,” Ric­cia­rdi said.

How to over­come it: Don’t base

■ in­vest­ing de­ci­sions solely on what’s hap­pened; think about what will drive gains in the fu­ture. Pri­or­i­tize se­lect­ing com­pa­nies with solid longterm po­ten­tial.

Di­ver­si­fi­ca­tion that’s not di­verse

You may in­ter­pret di­ver­si­fi­ca­tion to mean more is bet­ter. That’s only half the story; what’s im­por­tant is own­ing a va­ri­ety of as­sets (both stocks and bonds) with ex­po­sure to var­i­ous in­dus­tries, com­pa­nies and ge­ogra­phies.

Some­times in­vestors ex­hibit “naive di­ver­si­fi­ca­tion” by own­ing too-sim­i­lar as­sets, which does lit­tle to re­duce risk, said Dan Egan, di­rec­tor of be­hav­ioral fi­nance and in­vest­ments at robo-ad­viser Bet­ter­ment: “Peo­ple will have three or four dif­fer­ent S&P 500 funds and think they’re di­ver­si­fied but don’t look at how cor­re­lated they all are.”

Sim­i­larly, many in­vestors in­vest only in com­pa­nies they know, which re­sults in over-con­cen­tra­tion in cer­tain in­dus­tries, Ric­cia­rdi said. That may mean un­der­ex­po­sure to “the un­known” — like in­ter­na­tional stocks — which they per­ceive to be risky, he said.

How to over­come it: In­vest in a

■ wide range of as­sets. This can eas­ily be ac­com­plished with a sim­ple port­fo­lio con­structed of just a few mu­tual funds or ex­change-traded funds.

Mak­ing emo­tional de­ci­sions

When money’s on the line, it’s hard not to let emo­tions creep into your de­ci­sions.

Prior to the 2016 pres­i­den­tial elec­tion, many pro­fes­sional in­vestors ex­pressed con­cerns about a market slump if Don­ald Trump won. Bet­ter­ment data sug­gested that in­vestors who sup­ported Hil­lary Clin­ton might let pol­i­tics shape their in­vest­ment strat­egy — and cash out fol­low­ing the elec­tion, Egan said. So af­ter the elec­tion, the robo-ad­viser mes­saged in­vestors about the im­por­tance of stay­ing in­vested for the long haul, he said.

On a stock-spe­cific ba­sis, we of­ten let emo­tions dic­tate when to sell. “Peo­ple tend to sell win­ners too quickly when they go up and, on the down­side, they hold on to los­ing in­vest­ments too long,” Ric­cia­rdi said.

How to over­come it: Think about ■ in­di­vid­ual in­vest­ments in the con­text of your en­tire port­fo­lio and craft a plan for when you’ll sell that’s not trig­gered by short-term fac­tors.

Fo­cus­ing on to­day

It can be dif­fi­cult to see the value of sav­ing money for to­mor­row when there’s so much to spend it on to­day. That my­opia can make in­vestors ei­ther too ac­tive or too pas­sive.

If you’re too pas­sive, you may avoid reg­u­lar check-ins on fi­nan­cial health and stick with a sta­tus quo that doesn’t prop­erly pre­pare for the fu­ture, Ric­cia­rdi said. Be­ing too ac­tive can drive up trad­ing ex­penses, re­sult­ing in lower re­turns, he adds.

How to over­come it: Let the num­bers ■ do the talk­ing. Sit down with a re­tire­ment cal­cu­la­tor when chart­ing your in­vest­ing jour­ney. Make sure you fully un­der­stand the tax im­pli­ca­tions and costs as­so­ci­ated with sell­ing in­vest­ments.

Char­lie Neiber­gall / As­so­ci­ated Press

Re­searchers have found dozens of un­con­scious bi­ases that can drive peo­ple to make money de­ci­sions they later re­gret. Th­ese con­cepts in­clude “an­chor­ing,” when a num­ber you have in mind sways your de­ci­sion-mak­ing. Or, the “en­dow­ment ef­fect” can cause you to over­value some­thing be­cause you own it.

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