The rationally acting person only exists in theory. In practice, people do not only pursue economic goals and often their feelings play tricks on them. If investors are aware of these shortcomings when investing, they cannot completely avoid a number of mistakes, but they can at least mitigate them.
Mistake 1: Fall in love with a stock
Strong emotions when buying or holding an asset are downright dangerous. Again and again there are stocks that are driven up by fans. Their prices are not justified by fundamentals and valuations. The setback potential is correspondingly high. Papers with irrational price levels are likely to be found at the moment, especially in the areas of renewable energies, electromobility and corona vaccines.
Mistake 2: Have selective perception
An emotional relationship with a stock or stocks often leads investors to perceive the positive news about their positions and ignore the negative. It is striking, for example, that the profits of the e-car pioneer are really being celebrated. However, the fact that these hardly come from the sale of cars, but from the sale of CO2 certificates, does not seem to interest the Tesla disciples. It would be better if investors always remained critical and questioned the news situation.
Mistake 3: Stick to the general weather situation
Many investors find it difficult to change their assessment of the stock market environment. This takes a lot of effort to overcome when the worldview is extreme. An example is the statement that there is no alternative to stocks. This suggests that they actually cannot fall. Of course there are alternatives to stocks such as corporate bonds, gold or cash. If underlying data change, investors should act immediately and not stick to their assessment. It is at least conceivable that interest rates will rise as a result of rising inflation in the further course of the year, despite the expansive monetary policy of the central banks. What this would mean for growth stocks in particular is obvious. In such a scenario, it would again be: cash is king.
Mistake 4: Sitting out losses
A typical mistake that professionals regularly make is holding on to losing positions for too long. Although most investors are aware of this, they often let the losses run and, conversely, take profits too early. This is easy to explain psychologically. Realizing losses hurts emotionally, while taking profits caresses the soul. However, if you always act like this, only ruins remain in the depot.
Mistake 5: Follow the herd
It is almost always critical when a large number of stock exchange participants assess the situation and further developments on the financial markets in the same way. Because the herd is often wrong. Particular distrust is appropriate when the whole world agrees and downright hypes a value. Conversely, this means: Everyone is already invested, with high expectations. The consolation that one is in the best and great company when one is wrong can easily be dispensed with.
Some investors who don’t like to follow the herd may diversify a small portion of their portfolio with investment strategies preferred only by advanced traders, such as binary options trading. It is very important to choose a reliable broker before making high-yielding investments such as binary options trading. Make sure you find a trustable broker that is preferred by many traders, such as Expert Options.
Mistake 6: Take bulk risks
It is a truism that sensible diversification can limit risk. Conversely, the favorite stocks or sectors mentioned above cause unnecessary and increased cluster risks. Currently, we can observe that, for example, the long-spurned value stocks are experiencing a major renaissance while the technology sector is consolidating.
Mistake 7: Pay absurd prices
What applies to auctions can be transferred to the stock exchange. Right now there are numerous convincing business models that are likely to be accompanied by very strong overvaluations. A company’s market or technology leadership does not justify every price. With price-to-earnings ratios well above the industry average, investors are better off staying on the sidelines.
The errors listed and the behavior recommended in reverse may seem trivial at first glance. However, our emotions ensure that their implementation is far more complex than expected. Becoming aware of this is a first step in the right direction.
