- Trusting Authority: Some investors assume that an advisor is competent and ethical if he has a lofty title (financial consultant, vice president, and so on), dresses well, and works in a snazzy office. Such accessories are often indicators of salespeople – not objective advisors – who recommend investments that will earn them big commissions that come out of your investment dollars.
- Getting Swept Up by Euphoria: Feeling strength and safety in numbers, some investors are lured into buying hot stocks and sectors (for example, industries like technology, health care, biotechnology, retail, and so on) after major price increases. Psychologically, it’s reassuring to buy into something that’s going up and gaining accolades. The obvious danger with this practice is buying into investments selling at inflated prices that too soon deflate.
- Being Overconfident: The advent of the Internet and online trading capabilities has spawned a whole new generation of short-term (sometimes even same-day) traders. Some people get lucky the first time and let it get to their heads. They think they’re the next Warren Buffett. These folks will only seek help from professionals after being humbled by great losses.
- Giving Up When Things Look Bleak: Inexperienced or nervous investors may be tempted to bail out when it appears that an investment isn’t always profitable and enjoyable. Some investors dump falling investments precisely at the times when they should be doing the reverse – buying more.
- Refusing to Accept a Loss: Although some investors realize that they can’t withstand losses and sell at the first signs of trouble, other investors find that selling a losing investment is so painful and unpleasant that they continue to hold a poorly performing investment, despite the investment’s poor future prospects.
- Over monitoring Your Investments: The investment world seems so risky and fraught with pitfalls that some people believe that closely watching an investment can help alert them to impending danger.
- Being Unclear about Your Goals: Investing is more complicated than simply setting your financial goals and choosing solid investments to help you achieve them. Awareness and understanding of the less tangible issues can maximize your chances for investing success.
- Ignoring Your Real Financial Problems: Some high-income earners, including more than a few who earn six figures annually, have little to invest. These people have high interest debt outstanding on credit cards and auto loans, yet they spend endless hours researching and tracking investments. On the other hand, many people who have modest paying jobs are able to build significant personal wealth. The difference: the ability to live within your means.
- Overemphasizing Certain Risks: Saving money is only half the battle. The other half is making your money grow. Over long periods of time, earning just a few percent more makes a big difference in the size of your nest egg. Earning inflation-beating returns is easy to do if you’re willing to invest in stocks, real estate, and small businesses.
- Believing in Gurus: Stock market declines, like earthquakes, bring all sorts of prognosticators, soothsayers, and self-anointed gurus out of the woodwork, particularly among those in the investment community, such as newsletter writers, who have something to sell. People spend far too much of their precious time and money in pursuit of a guru who can tell them when and what to buy and sell.
