By Xavier Brenner When it comes to successful investing, the field of behavioral finance has shown that sometimes the worst enemy dwells in each of us. Human evolution has wired our brains with certain instincts that, if left unchecked, can lead to big investing mistakes, according to psychologists and behavioral finance specialists. In other words, those flight-or-flight responses that served our ancestors so well on the savanna may actually sabotage our investing. Here are 5 of the most common errors that investors make, and some tips on how to avoid them:
1) Spinning your wheels
Individual investors sometimes fall into the conceptual fallacy that winning in the stock market means out-hustling the next guy, acting on every scrap of new information and nailing new profit opportunities as they emerge. Trouble is, unless you have the processing power of high-speed server networks used by high frequency trading shops, this strategy is likely to fail for most investors. Sometimes, the best investing is boring. And timing the market is very tough, even for the pros. Only 22% of financial advisers tracked for a decade ending 2012 outperformed the Wilshire index, according to one study. Better to dump the race metaphor and think of investing as a long-term endeavor. Buying a holding a diversified portfolio with a mix of passive and active strategies can be a better strategy for many. Dollar cost averaging is also a good idea to ride out the ebbs of flows of the market.
2) Being inflexible
Investors have an understandable tendency to stick with the same methodology and assumptions that worked in the past. This is called anchoring and can cause trouble when market or industry conditions change.