We got inspired by Cooler Future's blog on the common mistakes you see with people investing. Here are our top six:
1. Never start investing
Ok, this one might seem easy but many people chose never to invest. The reasons are numerous. They do not trust the stock market, they think they are not capable, they wait for the “right time” on the market, or they wait to get richer before investing.
All of these can prove very costly, especially in an economy with high inflation. Individuals that keep their savings in cash see their real savings diminishing with the rate of inflation. If you had $10,000 saved in cash at the beginning of 2021, this would be only worth $9,300 in real terms now (Bloomberg).
Sadly, women are especially less likely to start investing. They are fewer to invest and invest on average less. Yet, they are better investors (Forbes)! This is even true adjusted for the gender pay gap. So no excuses for not starting!
2. Trying to beat the market
In 2020, 85% of professional active investors failed to beat the market over 10 years (CNBC). And these are professional! Scientific studies have shown over and over that the more you trade, the more likely you are to underperform: “intense buying by Robinhood users forecast negative returns” (Barber & al.). Investors with long-term diversified portfolios perform better.
3. Not adjusting your investment strategy to your own needs
There is no one-size-fits-all when it comes to investing. Everyone has different life circumstances and therefore investment objectives. Let’s say you are in your mid-twenties and saving for your retirement. You might be willing to take more risks since you will only need the funds in 30+ years. On the other hand, if you are planning a big purchase such as a home in the next 5 years, you might want to be more conservative. In case of an economic downturn, you might not have the time to see the market back on track and going up again.
This is why some firms have created target-date funds, especially for retirement. Your risk profile will reduce as you get closer to retirement, limiting the risk of large losses when you will need to withdraw the funds (Investopedia).
When choosing an investment strategy, it is critical to be clear and realistic on your objectives. Only then you can make the right investment decisions.
4. Bringing emotions, especially during recessions & bear markets
Investing should be rational. Yet it is hard not to get emotional when it comes to money, one of the most important enabler for your life goals. It is important not to panic especially when markets are down. Emotion-based investors tend to place excessive weight on certain parameters, getting away from reality. Impulse selling or buying are one of the main cause for underperformance (Investopedia).
CNBC put up three tips to help you keep your head cool during bear markets (CNBC)
5. Following the trends
We all have this best friend that tells you that company X is the next big thing. You like him, he is smart, and he just saw large gains on his portfolio with his particular stock. Yet, past performance are not prediction of future performance. Moreover, stocks with large popularity can get caught in bubbles. 2022 showed that some of the hottest companies of 2021 were the ones that took the biggest hit (Bloomberg)
It is your role to carefully study before investing in anything. And if you want to pick stocks yourself, one way is to carefully diversify and allocate a small fraction of your portfolio to stock picking.
6. Thinking your investments do not have a footprint
This is one of the biggest misconception in investing. Money has a carbon footprint and your investments do too. For example, your banks use the money in your savings account to lend it. You better check to whom they lend because it can be a coal-fired power plant or an oil major!
According to Cooler Future, investing $10,000 in the biggest companies has a footprint of 1,8 tons of CO2 per year. Becoming vegan saves you 1 ton of CO2 per person per year. Heading your portfolio into carbon neutral companies can help save almost twice more carbon than being vegan (Cooler Future, Greeneatz).
Conclusion
It is really important to take a cautious and careful approach when it comes to investing. Building your savings takes time, and requires you to be clear on your objectives. Talk to a professional if you are unsure, keep your head cool, and plan well ahead!
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