When it comes to investing, it’s easy to fall into our own traps. For example, we tend to buy more stocks when the market goes up… and stocks are more expensive. And it’s common to be overconfident when we seem to be on a winning streak. In this article, we provide eight tips to improve your investment habits and avoid some clear mistakes.
Over 15 years ago, the financial columnist of The Wall Street Journal, Jason Zweig, wrote a book titled “Your Money and Your Brain” that summarizes an important part of his investment wisdom. These eight tips are part of it and are aimed at helping investors avoid making forecasts, one of the least advisable behaviors if you want to avoid losing money…
1. Control what you can control
This first maxim holds true for almost any area of life. But in investing, it’s fundamental. As we already know, it’s very difficult – actually impossible – to predict market behavior. Among other things because a very significant part of what happens in it has a component of randomness. That’s why the most sensible strategy isn’t about discovering the next Google but controlling what we do know.
The first thing to adjust is our expectations, setting realistic goals. Equally, we can and should control the risk we want to take. And we should also focus on all the fine print of the investment, which unlike returns, are certain: management fees, commissions, and taxes. By reviewing these concepts thoroughly, we can already improve our investment results.
2. Don’t make forecasts
Will it be a good time to invest or is it better to wait for the Christmas rally? Will these stocks keep rising or have they reached their potential? These questions often lead to wrong decisions because answering them correctly is very difficult. Therefore, it’s best to focus on the long term and invest steadily and gradually. Only in this way will we cushion market ups and downs… and improve our returns.
3. Demand more evidence
When someone offers you excellent investment opportunities or a manager boasts about the excellent results of their fund, don’t trust blindly. It’s easy to showcase results when things go well, but how many other things went wrong? It’s important to know the complete track record to determine if the success of a particular investment product is the rule or rather the exception. It’s easy to know the list of the most profitable funds of the year, but what about those that were profitable and aren’t on the list because they closed?
4. Practice at home
If, despite everything, you want to make a specific bet or follow a hunch, wait. Think twice or, better, test it on paper. You read that right: act as if you were investing in that stock, and at the end of the period you consider, note the results. This way, you can confirm if your intuition was on the right track or if the paper saved you from a big disappointment.
5. Look at average returns
As always, the long term is an ally when planning our investments. Imagine an investment fund advertising its good results for one or more years. A great way to know if those results are really good is to compare them with the average. What was the market’s return in general during those years? Beating the market is an extraordinarily difficult task. That’s why indexed funds – which invest in an entire index – tend to offer better returns than those designed by managers.
6. Correlation or causality?
Nowadays, we have access to an ocean of data. That’s good news for analytical minds. But it also has the problem that, depending on how you select that data, you can reach conclusions that have little or nothing to do with reality. So be careful when you see a market forecast that links two variables that apparently have little to do with each other. Are they really cause and effect or more of a coincidence?
7. Think it over
This is another piece of advice that could be applied to almost any significant decision: take your time. Our brains are designed to look for patterns – and find them! – where they don’t exist. That’s why, when you think you’ve discovered a winning trend, that you’re on a winning streak, or a “pattern” like “since this stock has dropped for several years, it must recover,” stop and think: Does what I’m saying make sense? Am I rushing into things?
8. Don’t obsess
Most of us invest with a reasonably broad perspective. Therefore, except in very specific cases, it doesn’t make sense to check the performance of our investments every hour. Especially if we’ve made them according to a clear strategy and with a horizon of several years. Day-to-day fluctuations can discourage us or lead to overconfidence: in both cases, it’s better to stay the course and keep a cool head.
These eight tips to improve your investment habits won’t make you rich, but they will certainly prevent unnecessary scares and disappointments. Many times, that’s all you need to invest with peace of mind.
