8 traits of a bad investor: Are you guilty?

Bad investment habits can be a source of portfolio losses. Recognising which traits you tend to display and catching yourself when it happens can help you become a more successful investor. Here are eight bad traits to watch out for.

You don’t know why you are investing

Many investors invest to work towards financial freedom, grow their wealth, or simply because everyone else is doing it. However, not all investors can accurately identify what their wealth goals are.

More often than not, the answer to this goes back to one’s life goals. Why are you putting money aside for? Is it to purchase your dream car in the next five years, get a home upgrade within the next decade, pay for your child’s university fees, or to maintain your current lifestyle after an early retirement at age 55?

With clear goals in mind, investors can better find the discipline and motivation to stay invested during the market’s inevitable ups and downs.

You are easily swayed by the media

Even trustworthy media sources are not immune to misinformation or hypes. If you are susceptible to betting your savings on perceived inside scoops, inaccurate tips on hot stocks, or even hunches, consider approaching LFA for advice. Having a financial consultant can help you stay on track to achieving your life goals.

Ng Chun Hou, Associate Director of LFA said, “As financial advisors, we are in a better position to proactively identify our clients’ bad investment habits to let them understand their own investment characteristics better so that they can protect themselves from themselves. This is part of the behavioural coaching that we provide at LFA to educate our clients to become smarter and more disciplined investors.”

“To be a successful investor, you need to think long-term, diversify, and be patient. Trying to hit the homerun with one large gamble rarely works. Managing risks and taking risks blindly are two very separate concepts.”

You think you can predict the future

Investors who want to get rich fast without a plan tend to believe that they can predict the future. They may have certain views about a sector, or feel that they have the ability to pick winning stocks that can double their investment capital overnight.

However, you cannot outguess the market.

*Missing a few days of strong returns can hurt your overall portfolio.*

To time the market, you need to be right twice - once when getting in, and once more when getting out. This is a fool’s errand for most investors. If you simply miss the best five days in an investment period of 30 years, your annualised compound returns are expected to be halved.

You take stock market returns personally

Investors who think the stock market is out to get them have a poor mentality. When they lose money, it is the market’s problem. When they win money, it is a result of their great judgement. This selective accountability is not healthy in the long run.

These investors need to know that the stock market is not concerned with anyone’s emotions. Instead of feeling as if the market hates them, they need to be calm and more objective instead.

You act on impulse

Singapore’s GDP profile across downturns.

Here in Singapore, MAS predicts that the local economy will take longer to recover from the COVID-19 crisis than past recessions given that the shock has disproportionately affected domestic-oriented and travel-related services in Singapore - such as food and beverage, retail, construction and aviation and hospitality - unlike previous recessions that were typically driven by the external-oriented manufacturing sector.

With market turbulence and a slow recovery, unfocussed investors may be tempted to act on impulse. They may not be able to withstand the bear market and want to get out, or may chance upon an ill-informed opportunity and want a piece of the action. Acting on impulse is dangerous as it takes one bad move to deplete your portfolio returns.

You park money in cash indefinitely

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” — Robert G. Allen, investment advisor.

Following a market crash, investors may feel afraid, and understandably so. They may decide to liquidate their positions and keep their money as cash in the bank while waiting for a correction to happen so that they can re-enter the market.

However, inertia can be strong during correction. Cash may make investors feel safe as it is certain, and feel like a nice security blanket to have. As investors wait it out, they may not get back into the stock market. Sitting on a large sum of cash, instead of investing it, can hurt returns in the long run. Investors may be scared of losing money, but rather, they should be afraid of not having enough money as the cash sits there and steadily depreciates.

You are overconfident

There is a thin line that separates confidence from overconfidence. Confidence should come from the peace of mind after doing thorough research and due diligence. On the other hand, having an inflated view of what you think you can achieve suggests overconfidence, and can be harmful.

While difficult, investors will need to know when to admit that they are wrong, and when to overturn a decision to save themselves from further pain. No investor is always right, and being wrong is part of the investment learning process. While cliche, it is how you rise back up and prevent that mistake from happening again that matters.

You keep looking back

Investing is about the now and the future. While the past can provide some guidance, dwelling too much on it is a bad habit that prevents your portfolio from progressing. Studying the current environment and some lead indicators that give a glimpse of the future will be more helpful instead.