While we can learn much about successful investing by studying the best investors, it can also help to learn from our mistakes. The CFA Institute has identified the most common investing mistakes and here are six:1
1. Having unrealistic return expectations — Having reasonable return expectations can support good decision-making, risk management and long-term planning. However, 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 in the world.1 Consider that the 50-year average return of the S&P/TSX Composite Index (dividends not reinvested) is 5.9 percent.2
2. Lack of clear investment goals — Some investors may become too focused on short-term returns or the latest investment fad. A recent study in the U.K. suggested that less than one-third of investors had any specific long-term goal in mind when investing.3 However, 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. Failure 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 2020.4
4. Buying high and selling low — While a fundamental principle in investing is to “buy low and sell high,” many investors do the opposite because they are 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,4 which can become meaningful over time.
5. Excessive trading — Investing often involves patience to endure down-market times. 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. This often happens with little warning. Consider the S&P/TSX Composite — the rapid climb to end 2023 was largely unpredicted. Studies have shown that the average underperformance of active traders annually (vs. the U.S. stock market) is 6.5 percent.4
6. Reacting to media narratives — In this modern era of connectivity, we are being fed news at a rapid rate — and this news continues to be increasingly negative.5 In periods of market declines, this may trigger fear, which can cause investors to make hasty decisions not in their best interests. Yet, despite the negativity, consider that since 1975 the S&P/TSX has posted annual positive gains 77 percent of the time.6
Our Portfolio Managers at Q Wealth do their 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.
Our team is here to help keep you on course, to limit the impact of investment errors as we chart the path to longer-term success.
1. https://www.visualcapitalist.com/portfolio-return-expectations-by-country/; 2. S&P/TSX Composite Index 12/31/1973 - 1,193.56; 12/29/2023, 20,958.40; 3. https://www.fca.org.uk/news/press-releases/young-investors-more-likely-have-long-term-goals-mind-dating-when-investing; 4. https://www.visualcapitalist.com/20-most-common-investing-mistakes/; 5. https://www.bbc.com/future/article/20200512-how-the-news-changes-the-way-we-think-and-behave; 6. https://en.wikipedia.org/wiki/S%26P/TSX_Composite_Index
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