It takes good intentions to start investing, but it takes good habits to succeed in it. However good an investor’s intentions may be, just one bad habit can hinder that person’s investment success.
Here are the top 10 bad habits that investors need to break:
1. Setting unrealistic goals
Having unrealistic goals can dishearten investors, especially in this era when people are imitating celebrity lifestyles. Investors should avoid setting goals that are vague, too broad or exaggerated with no timeline. In addition, they should not set standards that are too high. They should evaluate both their present condition and intended position financially. They should also set short-term goals to achieve a long-term objective, and make sure that goal-setting is their personal initiative, according to CNBC.
2. Failing to plan
“If you fail to plan, you plan to fail.”
Lacking a financial plan means having no focus and being easily swayed. If investors do not have a plan for how to manage their money, they will be vulnerable to impulse buying, overspending and making other unwise decisions. Even if they are earning a lot, failure to plan will ruin their set objectives.
Investors should prepare a budget that details all the financial expenses they have. In case they make an inevitable decision that is not part of the budget, they will know about it and, in turn, be able to evaluate how to address it.
3. Being financially illiterate
Ignorance is an enemy of financial progress and success. Investors should increase their financial literacy by reading books, watching the news, closely following trending and emerging financial issues and practices, and working with a trusted financial advisor.
4. Becoming impatient
Impatience can lead investors to make quick and bad decisions. They should create milestones along the way to encourage them to pursue their ultimate goals further. Financial success takes time, so they should consider including a financial planner in their journey.
5. Lacking discipline
Without discipline, investors will not be able to achieve their financial goals. They should stick to the practices and strategies they have chosen to use. Those practices and strategies will eventually come to fruition if investors can maintain their discipline.
6. Resisting change
“Change is the only constant thing in this world.”
While holding on to the status quo is comfortable, but it is detrimental to financial success. Investors cannot achieve new things by repeating the same habits. To be able to achieve their goals, they will need to make certain sacrifices. If they agree to pay that price, the reward will be far greater than their sacrifice.
“Time wasted is life wasted.”
When investors put off the day when they start saving or make a financial plan, that can be a primary obstacle to their financial success. Every time investors feel like postponing something, they should resolve to do it immediately. They should overcome procrastination by taking action and, soon, they will adopt a constructive habit that will bring them closer to their financial goals.
8. Chasing performance
Extrapolating from the recent past to anticipate future performance is one of the strongest behavioural biases. Both individual and institutional investors tend to buy the last three-to-five years’ worth of winners and sell multi-year laggards – from asset classes, strategy styles to single stocks or funds, according to AQR Capital Management.
For instance, while there is strong evidence of short-term momentum – measured in months – over the longer term, an asset returning to its mean becomes more likely. Cash inflows from performance chasers tend to make expensive assets in bull markets even more expensive and cheap assets in bear markets even cheaper.
9. Seeking comfort
Seeking comfort leads investors to overpay for products that provide downside protection, such as variable annuities with guaranteed minimum payments, against what is referred to as left-tail risks. And, overpaying leads to poor returns. The interesting part here is that while investors overpay for insurance (demonstrating risk aversion), they also overpay for investments with lottery-like distributions (demonstrating risk appetite).
Seeking comfort in the form of smooth returns may also be the reason investors overpay for illiquid, private equity investments. The fact that returns are not frequently reported, and valuations may not be adjusted to true market value, may lead to the appearance of smoother returns than the actual case.
Many investors tend to concentrate their portfolio risk. For instance, home country bias makes investors all over the world believe that their domestic market is both safer and will provide higher returns, which can lead them to overweight the equities of their home market.
By diversifying, however, investors can reduce risk on their investments for the long term. In a previous article, we detailed how portfolio diversification can be achieved.
To be able to achieve investment success, investors should replace these bad habits with good practices. Correcting bad habits may not be easy to do, but it can lead to dramatic improvements in investment returns.