What should you know?
In 2017, Dalbar (a leading financial research company) undertook a quantitative analysis to identify the difference between the investment returns achieved by the average investor vs the returns produced by the stock market over the previous 10 years.
The results were astounding. The average investor only achieved about half of the returns the stock market produced over the period:
The difference is known as the ‘Behaviour Gap’ and can be explained by the simple investment mistakes many people make.
Here are the top three behavioural mistakes to be wary of:
Emotional Decision-Making: When you allow your emotions to drive your investment decisions it can lead to impulsive actions, like moving to cash during market downturns or buying into ‘hot markets’.
Herd Mentality: Following the crowd through fear of missing out (FOMO) on the latest hot stock or trend. This often leads to buying assets you don’t fully understand, for reasons you haven’t fully thought through.
Overconfidence: Believing you have the ability to predict the next movements of markets or individual stocks.
Why should you care?
There is no quick fix or magic formula. For every overnight millionaire, there are 1,000 people who lost money through misguided decisions, often driven by greed or fear.
Investment success is achieved with time, patience, and the repetition of good financial behaviours. If you get your behaviour right, everything else will fall into place.
