The world of investing can be intimidating. Trying to choose between thousands of stocks, bonds, and mutual funds, as well as the numerous advisors vying for your business, can paralyze and imprison you. Worse, you may be misled and fall victim to one or more of the seven deadly investing sins.
The investing sins do not harm your soul, only your assets — which is bad enough.
1. Trap for anchoring
Anchoring is the over-reliance on one’s initial thoughts. It entails holding on to the idea of an asset’s initial value to such an extent that a person makes poor decisions. For example, you may believe that a particular company is successful and that investing in its stock is a wise decision.
This concept, however, may be incorrect at this time or in the future. The same thing happens when an investor holds onto a stock for too long because they are anchored on the higher price at which the stock was purchased when, in reality, the stock should have been sold a long time ago.
To avoid this trap, you must keep an open mind and be open to new sources of information. You must also understand that just because a company is doing well today does not guarantee that it will continue to be successful tomorrow. Some factors have been shown in studies to mitigate anchoring, but it is difficult
to avoid it entirely, even when people are made aware of the bias and deliberately try to avoid it.
2. Sunk cost snare can be deadly
This entails safeguarding previous decisions or choices, which are frequently detrimental to your investments. This is caused by refusing to accept that you made the wrong decision, which resulted in losses. It is also the tendency of a person to follow through on something that does not meet their expectations, primarily because they have already invested their time or money in it.
This explains why people keep clothes they don’t wear, eat meals that don’t taste good, and watch movies they don’t like until the end. Also, why do they hang on to underperforming investments?
You must accept the loss or the fact that you made a poor decision, no matter how difficult it may be. If your investment does not go as planned, exit before the asset price falls even further. A word of caution.
Avoid any emotional attachments to your investments to make it easier to sell before things worsen. Setting investment goals is the best way to avoid falling into this trap.
3. The trap of pseudo-certainty
Loss aversion is another term for an investor’s attitude toward risk. When investors expect positive investment returns, they limit their risk exposure; however, when they expect a loss, they will reach out more and take more risks. They are willing to raise the stakes in order to reclaim capital but not in order to create new capital.
Loss aversion may be present when the prospect of losing money outweighs any potential for profit from an investment. It usually occurs when an investor is unwilling to take risks in order to avoid losses. Of course, there is always risk in investing, and some investments are riskier than others.
When you have loss aversion, you miss out on opportunities to make money.
4. Superiority complex
The overconfidence trap is another name for it. Many investors are overconfident, believing that they know more than experts and even the market. Being well educated does not preclude you from benefiting from a few pointers here and there. Many investors have lost large sums of money by believing that they are better than everyone else, and these are often the same people who fall into the aforementioned investment traps.
Investors who are trapped in a superior state of mind have exaggerated perceptions of themselves. They are overconfident in their investments and capabilities, and as a result, they may reject good advice that could lead to mistakes in judgment.
An investor may become reckless and enter a losing position because he or she believes he or she knows better than the market. The investor believes that the market will eventually recognize the stock’s value proposition and drive it higher. However, if the stock continues to fall, the investor decides to cut losses and exit the position.
If you are overconfident in your investments, you may fail to implement the necessary safeguards to protect your investment capital. You may make poor decisions and end up putting too much money at risk, which will only result in losses.
5. FOMO
This abbreviation stands for Fear Of Missing Out. This is related to the sheep behavior in that it causes people to do what others do without thinking things through. Sheep mentality refers to an individual’s tendency, in this case, investors, to mimic and copy what other investors are doing.
Instead of independent analysis, they are heavily influenced by instinct and emotion. Investors likely follow other investors because they see their success rather than making their own informed decisions about where they want to invest.
Investors who fall into this trap typically believe they are missing out on a potentially lucrative investment because their friends or family members are heavily invested in it.
6. The trap of irrational exuberance
Irrational exuberance, also known as overconfidence bias, is a tendency to have an inaccurate and misleading assessment of our abilities and intellect. In a nutshell, it is the belief that one is superior to oneself. While confidence is thought to be a strength in many situations, it is actually a weakness when it comes to investing.
As if there is no uncertainty in the market, investors tend to believe that the past equals the future.
What happened before will almost certainly happen again. There will always be ups and downs, which will turn the tables on previously successful investments. Often, investor overconfidence turns to greed, and the market is pumped to the point where a massive correction is inevitable.
And those who went all-in right before everything went wrong, the overconfident ones who believe the well will never run dry, are the ones who suffer the most. If you’re new to the world of investing, consider working with someone with experience who can devise a sound investment strategy that maximizes profits while minimizing risk. You do not have to rely solely on yourself because there are numerous experts available to assist you along the way.
7. Confirmation trap kills investments
When people look for and pay attention to other investors or assets that confirm their current beliefs, they fall into a confirmation trap. It may also happen if investors continue to seek advice from people who have made and continue to make the same mistakes. Sometimes people seek advice from these people in the hopes of making the right decision this time.
Instead of listening to someone who gave you bad advice, seek out new sources who can provide you with sound advice on potential investment locations.
When researching an investment, investors may unintentionally seek or favor information that supports their preconceived notions about the asset or strategy, while failing to recognize information that contradicts their ideas.
