Last week, I mentioned some investor errors investors make, and decided to put together a top 10 list of broad and common mistakes.

So far, we have looked at Excess Fees, and Reaching for Yield. Today we are going to ever so briefly look at mistake number three — behavioral issues in investing. (for far more details, see this collection of posts).

3. You Are Your Own Worst Enemy: Your emotional reactions to market events is yet another detriment to your results. Typically described as Fear & Greed, it is more complex than that. But for starters, Fear & Greed does enough damage.

Do you get excited about hot new companies? Do you love chatting about stocks at cocktail parties? On the other hand, do your holdings keep you up at night? Are there periods where you cannot bear to even open your monthly statements?

These all suggest that you, like most humans, are an emotional investor. This manifests itself in two ways: With heavy buying of equities at the regardless of valuation as excitement builds near the top of the cycle (most public ownership of equities occurs this way); secondly, with panicked selling, typically near major inflection points.

You can take steps to protect yourself from, well, yourself. Predetermine your exits and stick with it. Make decisions while objective, before emotional trouble hits.Set up a Mad Money account with a less than 5% of your capital. This will allow you to indulge “your inner Cramer.” If it works out, that’s great — maybe you are thr next Steve Cohen. If it’s a debacle (and the odds are it will be), it’s a terrific lesson that will serve to remind you that trading in and out of stocks like a deranged hedge fund manager is not your forte. Be thankful it wasn’t most of your retirement assets that you lost.

Your emotions are often the enemy of your financial well-being. Learn how to keep them in check, or to protect yourself from them, to become a better investor.



Top 10 Investor Errors
1. Excess Fees
2. Reaching for Yield


Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Mutual Fund vs ETFs
5. Asset Allocation Matters More than Stock Picking
6. Passive vs Active Management
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For

Category: Apprenticed Investor, Investing, Psychology, Rules

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “Top 10 Investor Errors: You Are Your Own Worst Enemy”

  1. OT:

    on ‘walkabout’..


    maybe, by the time I get back, you’ll have BRIPTV up, ready for streaming..~

    Investor Error(?)

    Staying too Close( to something.. ), for too Long..

    Sometimes a Change of Scenery provides a perspective, from which, you can see more..

  2. end game says:

    One study showed that 96% of mutual funds underperformed the S&P 500 after taxes, and the average margin behind the benchmark was -4.76% per annum. The 4% of funds that outperformed did so by only 0.59% on average. If professional investors managing the most assets have so little chance of outperforming, what chance do individual investors have? Regarding “indulging your inner Cramer”, Barron’s found that Cramer’s picks underperformed, too. The 2011 Dalbar study found that “investors are still their own worst enemy”, underperforming the S&P 500 by -5.87% annually over 20 years. Dalbar blames a “behavior gap” for the big difference between the average investor’s huge underperformance. BR is definitely onto something important. While fees and taxes can be blamed for much of professional investors’ underperformance, behavioral issues probably hurt individual investors’ returns, making them fall behind the pros.

    All of which makes the S&P 500 index funds look like the gold standard… until you consider that a fundamental index, which avoids structural errors inherent in the S&P 500, probably outperform the S&P 500 by 2% a year. Therefore, the gap between a “fundamental index” fund’s performance and that of mutual funds, let alone individual investors, is likely to be absolutely enormous.

  3. faulkner says:

    Barry, Great idea for a series. My concern is the characterizations of the errors (and error makers). The process of naming powerfully highlights and hides aspects of experience. Calling yourself your “own worst enemy” and “an emotional investor,” while attention getting (and emotion evoking), creates dichotomies that become the basis of the strategies used to cope with them. (How do you deal with your worst enemy?)

    All of this is done without ever questioning if these names are highlighting our experience in useful ways. For example, neuroscientists have discovered that emotions are necessary for decision-making. So, it’s not if you are emotional, but which ones and how much. Further, the attention on emotions hides that they are reactions to other aspects of experience. It’s easier to manage information input than talk yourself out of an emotion.

    Your “Mad Money account” is a great idea. Benjamin Graham’s “Mr. Market” is another version of this. They are both examples of “displacing” aspects of ourselves instead of denying them or making enemies of them.

  4. mathman says:

    This QOTD is pretty lame. i mean cahmahn – if you’re being tortured or living with an incurable disease, life isn’t worth living for one more minute whereas if you’re rolling in dough and are healthy then let the good times roll, eh! Some people like doing everything they can like cooking, working on their car or repairing the lawn mower and others are sa gaddamn lazy that it takes dynamite to get them off their ass – it’s all just sa damn RELATIVE that a quote like this is meaningless to me.
    Just my 2 cents.

  5. boveri says:

    Not only is this great advice but possibly the most important of BRs 10 points – “You can take steps to protect yourself from, well, yourself.”

    I don’t believe anyone who is a trend follower will not be emotionally pulled at the worse time by the action of the market. It goes with the territory and steps must be in place to reverse course early after emotional trades are made.

  6. [...] Top 10 Investor Errors 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock [...]

  7. Iamthe50percent says:

    This is not only true about the stock market, but Life in general.

  8. [...] Previously: 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock Picking 5. Passive vs Active Management 6. Mutual Fund vs ETFs 7. [...]