To be an intelligent investor and make money is not only about "fighting" against the complexity of the markets; also “of fighting against ourselves; to try to avoid the traps that our own brain puts in our path or to put aside, among other things, false expectations”.Below I bring you a small list of these errors with their solutions.
Decide not to do anything with the money because it can be lost. That money, with the precision made that it will not be needed to cover current expenses or even some unforeseen event, will end up losing value if only due to inflation.
Want to win a lot and never lose. Once you stop being a saver and become an investor, there is a risk of creating unrealistic expectations. If you err on the side of optimism, you can alter your ability to criticize when choosing a product to invest in, ignoring its negative information. Excessive optimism (or from another point of view, loss aversion) can also cause investments to be maintained that are already generating capital losses and that are difficult to recover.
Give little value to time. Do not take into account that it is not the same to invest a year ahead than to invest 10 years. It is about trying to define the time horizon well.
Not be consistent. Initially follow the strategy developed in the medium and long term, but not know how to maintain it over time, either because the value of the portfolio is constantly being evaluated, or because it is carried away by specific moments of striking rises or falls. If strategies are broken, there is a risk of missing recovery moments or paying excessive commissions.
All red.It's about diversifying. Don't "put all your eggs in one basket." Do not get carried away by the specific fashions or by the comments of the various "brothers-in-law". Try to design a portfolio with assets that are uncorrelated with each other in order to limit fluctuations in profitability.
Let yourself be overwhelmed by fascinating stories.It doesn't make much sense that a significant part of your wealth is in some very original and surprising asset. Although it is on everyone's lips. There is talk of the herd effect or social proof. It is the tendency to imitate the actions of other people under the belief that the correct behavior is being adopted. This bias occurs in situations in which the investor does not have a definite idea of how to behave and allows himself to be guided by the behavior of others, assuming that they have more knowledge.
Be very active changing investments. It is not really possible to anticipate what is going to happen in the markets and, therefore, the risk of being wrong is very high. Linked to this idea is the hyperbolic discount bias. Let yourself be carried away by the idea that you can get, with constant changes depending on the evolution of the markets, many small rewards and more immediate in terms of profitability. The attraction generated by these possible prizes can lead the investor to undo an investment designed for the long term and suitable for their profile.
Think of what was before. Believing that if an asset had a certain price in the past, it will return to it. This error falls under what is more generally known as anchoring bias. It comes to be getting carried away by a first data, normally that of past or foreseeable future profitability, without considering other data that is not as positive as the associated risks.
Being overconfident in oneself. Believe unbeatable. Yes, you have to maintain investment strategies, but not have a total attachment to them. One's own knowledge must be complemented with that of others; better if these are critical. Do not forget either that situations change.
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