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Investment mistakes to avoid

Here are a few common investment mistakes that new investors should avoid.

Video Transcript


NARRATOR: Successful investing requires something perhaps even more rare, the ability to identify and overcome one's own psychological weaknesses. Here are five mistakes. Number one, overconfidence. Overconfident investors trade more rapidly because they think they know more than the person on the other side of the trade. Trading rapidly costs plenty and rarely rewards the effort.

Number two, selective memory. In terms of investments, we don't want to remember the investment calls that we missed, much less those that proved to be mistakes that ended in losses. Number three, self-handicapping. As investors, we may succumb to self-handicapping, perhaps by admitting that we didn't spend as much time researching a stock as we normally had done in the past, just in case the investment doesn't turn out quite as well as expected.

Number four, loss aversion. Many investors will focus obsessively on one investment that's losing money, even if the rest of their portfolio is in the black. Regret also comes into play with loss aversion and can lead us to make a bad sell decision, such as selling a solid company at the bottom instead of buying more.

And number five, sunk costs. This theory states that we're unable to ignore the sunk cost of a decision, even when those costs are unlikely to be recovered. Sunk costs may also prompt us to hold onto a stock, even if the underlying business falters, rather than cutting our losses. Had the dropping stock been a gift, perhaps we wouldn't hang on quite so long. Stay financially fit, friends.