“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” — Warren Buffett
While we can learn much about successful investing by studying the best investors, there may be valuable lessons learned by examining our mistakes. The CFA Institute has identified 20 of the most common investing mistakes, and here are seven notable pitfalls:
1. Having too high expectations — Having reasonable return expectations can support good decision-making, risk management and long-term planning. Yet, investors tend to have higher expectations than those who manage money professionally. One study suggests that Canadian investors expect an average annual return of 10.6 percent on investments, whereas financial professionals anticipate 6.5 percent, leading to one of the highest expectation gaps globally1. Consider that the 50-year average return of the S&P/TSX Composite Index (dividends not reinvested) is 5.9 percent.2
2. Not focusing on investment goals — As the saying goes: “If you don’t know where you are going, you will probably end up somewhere else.” Sometimes, investors may become preoccupied with the latest investment fad or on maximizing short-term returns, instead of focusing on a portfolio that is designed to achieve their longer term investment objectives. Consider that even a modest investing program can yield significant dividends down the road. Investing just $20 per day at an average annual return of 6 percent would yield over $1.2 million in 40 years.
3. Failing to diversify — A well-diversified portfolio is important to achieve an investor’s appropriate level of risk and return. Having too much exposure to a single security or sector comes with risks. Diversification is intended to protect from the downturns that may affect sectors at different times, while also giving access to the best performers. Consider the difficulty in consistently picking individual winning stocks over long periods: only 21.4 percent of U.S. stocks beat the market over 20 years from 1927 to 2020.3
4. Reacting to short-term noise — Reacting to short-term noise can cause some investors to second-guess their original strategy and make hasty decisions. By one account, this may account for 50 percent higher transaction fees paid by investors who hold a short term view.3 As the CFA Institute notes: “There are two timeframes that are important to keep in mind: the short term and everything else. If you are a long-term investor, speculating on performance in the short term can be a recipe for disaster because it can make you second guess your strategy and motivate short-term portfolio modifications.”4
5. Buying high and selling low — Not surprisingly, investor behaviour during market swings can hinder overall performance. While a fundamental principle in investing is to ‘buy low and sell high,’ many investors do the opposite because they may be motivated by fear or greed. It has been estimated that the loss in returns by buying high and selling low versus a buy-and-hold strategy is on average around 2 percent annually,3 which can accumulate and become meaningful over time.
6. Trading too much — Timing the markets is difficult, if not impossible. Even if you were to exit the markets before a downturn, you’d need to reenter before the markets resume their upward climb, and this often happens with little warning. While many active traders try and time the markets, studies have shown that the average underperformance by the most active traders annually (versus the U.S. stock market) is 6.5 percent.3
7. Reacting to the media — In this modern era of connectivity, we are being fed news at a rapid rate and studies show that the news continues to be increasingly negative.5 In periods of market declines, this can often trigger fear, which can cause investors to maker ash decisions that may not be in their best interests.
As advisors, we do our best to prepare clients by putting a plan in place to set priorities and using a disciplined approach that emphasizes asset allocation, strategic diversification, risk management and a focus on quality to guide us through the different cycles. We can also choose to integrate different techniques into investing programs to reduce impulsive decision-making, as many investing errors result from succumbing to our behavioural biases. This may include regularly rebalancing portfolios, using managed products to put buy/sell decisions in the hands of experts or incorporating systematic investing programs like dollar-cost averaging or dividend-reinvestment programs.
We are here to help keep you on course and limit the impact of these and other pitfalls as we chart the path to longer-term success. For a visual of the 20 most common investing mistakes, see: https://www.visualcapitalist.com/20-most-common-investing-mistakes/
1. https://www.visualcapitalist.com/portfolio-return-expectations-by-country/;
2. S&P/TSX CompositeIndex 12/31/1973 — 1,193.56; 12/29/2023 — 20,958.40;
3. https://www.visualcapitalist.com/20-mostcommon-investing-mistakes/;
4. https://www.cfainstitute.org/-/media/documents/support/future-finance/avoiding-common-investor-mistakes.pdf;
5. https://www.bbc.com/future/article/20200512-how-thenews-changes-the-way-we-think-and-behave
The information contained herein has been provided for information purposes only. Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information has been provided by J. Hirasawa & Associates and is drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) and the authors do not guarantee the accuracy or completeness of the information contained herein, nor does WAPW, nor the authors, assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances. WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
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