As humans, one of our biggest downfalls is overconfidence.
While it is human nature to be optimistic, it’s impossible to foresee the future. If we were able to predict the future, we would all be rich and know the weather forecast for the week. This is what makes investing such a risk. When considering that we are our own worst enemy, the first line of defense is recognizing some of these quirks.
Here are a few of the common errors we fall prey to:
When thinking of past situations, hindsight isn’t always 20/20, as the old saying goes. The less we revisit an event or a thought, the more exaggerated or convoluted it becomes in our minds. When it comes to past investments, missed/taken opportunities and stock calculations, keep track of the details so that you may go back and revisit them, and your thoughts at the time, often.
We all make mistakes, and investing isn’t any different than any other situation in life. There is risk in trusting your own judgment, and many people feel they need affirmation of their decisions. It’s important to make your decisions independently, learn to live with mistakes made, and always be sure not to exaggerate your own abilities or downplay the role that luck plays.
Don’t get fixated on the numbers game. Research shows that you can change the outcome of an estimation by presenting a completely unrelated question involving a number. You can’t simply assume that unfavorable market conditions will persist in the long term based on a short-term downturn. In doing so, you are limiting your ability at long-term gains just to avoid short-term losses.
Without emotional control, life, and investing, can quickly turn to disaster. You are more apt to be devastated by a 1 percent loss than you are to be elated by a 2.5 percent gain. And, as we all know, the market has a 50/50 chance of loss or gain daily.
Reduce the amount of time you spend daily checking your portfolio. The amount of “screen time” spent should be going from minutes, to hours, to days. The more you watch the fluctuation, the more you are exposed to negative emotion, making it more difficult to process the information rationally.
Imagine how much it hurts to sell at a loss and lose more than just your own money. Avoid borrowing money to invest. One drastic disruption in your portfolio can cause you to lose more than you started with. When considering the concept of long-term investing, keep in mind that you are investing for financial freedom, not for quick consumption.
Every error made can be corrected. Some may be more costly than others, of course, but nonetheless, still correctable. By taking measures to avoid some of the more common downfalls, we are gearing ourselves up for long-term success. Regardless of the outcome always remember, there is no shame in being wrong, only staying wrong. ●
Umberto P. Fedeli is president and CEO at The Fedeli Group