Part One: Little-Known Investment Mistakes You Might Be Making
Fact: Sir Isaac Newton made a very big investment mistake. Here’s how:
England, the Spring of 1720: The South Sea Company is the hottest stock on the market. Newton invests a small amount of money. Soon, he cashes in on his fantastic returns and walks away with a 100% profit.
From the sidelines, he watches prices continue to rise. Thrilled, he jumps back in, purchasing expensive shares close to the market’s peak. But the bubble quickly bursts. Prices plummet. Newton keeps holding on, eventually selling well below his initial buying price.
In today’s terms (2017), Newton lost the equivalent of £3m.
Newton’s excitement pushed him towards an emotional investment decision. He watched prices rise, feared missing out, then dove straight back in. This is what is called “chasing the market.”
Mistakes are unavoidable. As we’ve just seen, even geniuses make them. But the mistakes we make often provide us with the greatest lessons. And although making your own mistakes is a great way to learn, you can take a couple of shortcuts with some second-hand stories.
There are long lists of common investment mistakes to avoid. These types of lists discuss the dangers of:
- Not diversifying
- Chasing the market (as we’ve just seen)
- Not conducting your own due diligence
- Starting too late
But we wanted to take a look at some of the lesser-known investment mistakes; the really simple tricks that are often overlooked.
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Believing the hype
In an article entitled “Why Do Clever Investors Make Big Money Mistakes?” Koon Yew Yin reports that over 80% of day traders mainly lose money because they “select shares based on hot tips.”
These “hot tips” create the same mentality that Newton fell into. On the basis of speculation and excitement, he chased performance. He watched shareholders’ profits rise, and jumped on the bandwagon.
A similar mistake can be made when prices dip, especially when risk-averse investors adopt risk-taking strategies. Knee jerk reactions can lead to panic selling.
Because equity markets (stocks and shares) are so volatile (frequently go up and down), it’s unlikely that hot tips are legitimate indicators of potential activity. And even if they were founded in some calculated effort, why would the world be told? Wouldn’t that throw everything off balance anyway?
In believing the hype, there’s also risk in assuming day-to-day volatility to be the end of the world. It’s very easy to fear graphs that look like mountain ranges - but it might not be wise to look at performance through a microscope. Sometimes it’s wise to take a step back and focus on the bigger picture.
An article that describes this perfectly is Dan Egan’s “Experiencing Short-Term Losses Is a Part of Long-Term Gains.” He writes,
“I’ve learned that losses are usually common, fleeting, and benign—as long as you know you’re invested appropriately and are expecting, rather than reacting, to them.”
Let’s look at the UK housing market, for example. According to Nationwide’s UK Monthly Indices, house prices fell by 0.3% between February 2017 and March 2017. However, between March 2016 and March 2017, house prices experienced an overall increase of 3.5%.
From this data, two very different stories could be spun. The first of which could read, “UK House Prices Plummet by Almost Half a Percent in One Month.” Another could read, “UK House Prices Have Climbed by 3.5% in the Past Year.”
Same data, different hype. And both stories might make you do different things.
In part two, we cover two more little-known investment mistakes you might be making. Stay tuned!
Written by Jenna Kamal
Disclaimer and Legals
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.
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