Investors are their own worst enemies sometimes. As market participants, we often struggle with the pitfalls of fear and greed. These two emotions have the potential to inflict more damage to a portfolio than anything found lurking in economic reports or quarterly conference calls. However, beginners can mitigate risk by avoiding some common mistakes.
The cost of having emotions play a role in your portfolio is expensive. According to DALBAR’s latest Quantitative Analysis of Investor Behavior, the average investor earns significantly less than major benchmarks. Over the past ten years, investors in equity funds earned an average of 5.9 percent per year, compared to the S&P 500’s average gain of 7.4 percent per year. The gap is even larger when looking at the previous twenty years. Sensible investing strategies such as dollar-cost averaging can contribute to this performance gap, but imprudent action is still far too common.
“Through QAIB, we have learned that the greatest losses occur after a market decline. Investors tend to sell after experiencing a paper loss and start investing only after the markets have recovered their value,” explained the report. “The devastating result of this behavior is participation in the downside while being out of the market during the rise.”
Let’s take a look at five rookie investing mistakes that should be avoided.