The author Joe Wiggins says that poor investment decisions take place when our expectations of what we are capable of exceed the reality.
Following are a few situations of what we think we can do, but probably can’t:
- Timing the markets: many investors try to predict what will happen, and when will it happen in the stock market. The ‘when will it happen’ part is considered as timing the market. The stock market is considered as a complex, adaptive and a chaotic system. Forecasting ‘when will it happen’ is very difficult and usually can’t be done accurately. Yet, investors think that they can do it and continue to do it.
- Truly understanding complex funds: Many funds are complex in nature. Such funds promise high return with low, differentiated risks. Investors usually don’t understand the nature of such funds. Yet, they are attracted to the high return promises made by these funds and invest in them. They break an important rule of investing. Don’t invest in things you don’t understand.
- Predicting Inflation: Macroeconomic variables are affected by many factors. One such variable is inflation. Inflation is usually affected by many factors. It is hard for an investor to predict inflation. The investor doesn’t know which all factors are playing the role at a given time. Hence, the investor won’t be able to predict the inflation estimates accurately.
- Pick funds that consistently outperform: A myth in fund investing is that any manager or strategy can consistently beat the market. Even a skillful fund manager will underperform for prolonged periods. Many times, we fail to realise this. Due to this, we get trapped in a painful cycle of selling losing funds and buying yesterday’s winners.
- Withstand poor performance: Weak performances are almost impossible to avoid for any strategy, fund or asset class. These scenarios are easy to deal with in theory. But in practice, the experience is entirely different. An investor can have stress, anxiety and doubts during difficult periods. An investor may feel that a poor performance can be completely avoided throughout the life of the investment process. This leads to making poor decisions at just the wrong time.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”