Investors often hurt themselves by making emotional decisions and through unconscious behaviors that are counter-productive. In an excerpt from Winning the Loser’s Game, Charles Ellis identifies eight risks to avoid:
- Trying too hard.
- Not trying hard enough. Usually by having too much in money market funds or bonds.
- Being impatient. If your investments went up 10 percent a year, that would be less then 1 percent a month. On a daily basis, that rate of change would be anything but “interesting.” (Test yourself: How often do you check the prices of your stocks? If you check more than once a quarter, you are satisfying your curiosity, not your need for price information.)
If you make an investment decision more than once every year or so, you are almost surely being too active in trading, and it will cost you.
- Changing the mutual funds you own in less than 10 years. If you’re doing this you’re really just “dating.”
Investing in mutual funds should be marital—for richer, for poorer, and so on: Mutual fund decisions should be entered into soberly and advisedly and for the truly long term.
Changing mutual funds costs investors heavily: The average return realized by mutual fund investors is sharply lower than the returns of the very funds they invest in just because investors sell funds with recent disappointing performance and buy funds with recent superior performance.
As a result, we all too often sell low and buy high, repeatedly throwing away a signiﬁcant part of what we could have earned.
- Borrowing too much. Three out of four of the fortunes that are lost get lost because borrowed money was used. The borrowers were hoping to make an even bigger pile, but it became a painful “pile up” instead.
- Being naively optimistic. Being hopeful is often helpful in other ﬁelds, but in investing it’s much better to be objective and realistic.
- Being proud. Over and over again, studies show that we substantially overestimate our own investment capabilities and our performance relative to the market. And we don’t like to recognize and acknowledge our mistakes—even to ourselves. Too often, we are also stubborn. Remember the adage: “The stock doesn’t know you own it.” And it really doesn’t care about you.
- Being emotional. We smile when our stocks go up and frown or kick the cat when our stocks go down. And our feelings get stronger and stronger the more—and the faster—the prices of our stocks rise or fall.
Excerpted with permission of McGraw Hill, from Winning the Loser’s Game, 6th Edition Timeless Strategies for Successful Investing @2013, by Charles D. Ellis.