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Don't Make This Investing Mistake in 2016

By Selena Maranjian – Jan 19, 2016 at 7:56AM

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Don't let your emotions or our personality drive your investing behavior more than reason and rational thinking.


Image: Pixabay

It's hard to write an article about a single investment mistake to avoid in 2016 (and beyond) -- because there are just so many dangerous mistakes that so many of us make. The more I thought about it, though, the more I realized that many of these mistakes are kind of in the same category: They happen when we let our emotions or our personalities drive our investing behavior more than reason and rational thinking.

Below are a few examples of emotions and personality traits that can get in our way when we're trying to build wealth through investing in stocks.

Impatience
Impatience might seem relatively innocuous, but it can be deadly to wealth-building. That's because few great investments rise in value in a straight line. Volatility is to be expected in the stock market, and terrific companies can spend a long time in a slump before rising closer to or beyond their intrinsic value.

Image: Pixabay.

Short-term thinking can doom you to mediocre results. Consider shares of Amazon.com, for example. Over the past 15 years, they averaged annual gains of 26%. That's great, but it hasn't been a smooth ride for long-term investors. The stock delivered triple-digit gains in 2007, 2009, and 2015, but it also shrank by double-digits in 2006, 2008, and 2014. Winners with Amazon stayed the course.

Another bad consequence of impatience and frequent buying and selling is that you rack up a lot of commission costs and you can face higher tax bites, too, for short-term capital gains.

Impulsiveness
Impulsiveness is also dangerous to your wealth. It can have you investing in stocks or other things merely after reading a glowing article or seeing some prognosticator on TV praise them. You might also invest in certain companies just because you want to, because they're titans in an industry you love or are exciting up-and-comers.

Being disciplined will serve you much better. Before investing in any stock, study it closely, reviewing its financial statements, considering its competitive advantages, evaluating the attractiveness of its current price, and so on. Ideally, demand proven profitability, balance-sheet strength, little or no debt, and great growth prospects.

Image: Pixabay

Fear
Don't succumb to fear when investing, either. It can have you bailing out of terrific companies just because they have encountered a temporary problem or perhaps because the whole market has headed south for a while. As an example, think of Chipotle Mexican Grill, which has seen its stock drop by about 33% over the past year, following news of multiple instances of food contamination. If you're an investor and are considering selling out, worried of further price drops, ask yourself how likely this is to be a temporary or permanent situation. If you have faith that the company can regain consumer confidence (perhaps in part via its Feb. 8 all-day store closings to update employees on new safety processes), then you'd do best to hang on.

It's smart to have an overall investment plan, too, and to be committed to sticking with it, despite inevitable market drops. Determine what kind of investor you are and how you will go about investing -- such as by committing to long-term value investing, where you seek out undervalued stocks and hang on.

Image: Pixabay.

Greed
Greed, not surprisingly, can also do you in. You might, for example, chase high-flying stocks that are already overvalued. If so, then they may be more likely to fall in value than to rise further. Greed can have you rushing into investments you don't completely understand -- as it did with many Enron investors years ago.

Greed can also have you trying to time the market or certain stocks, aiming to get in at the best time and out before trouble occurs. No one can really know exactly when the market or given stocks will rise or fall, though, and you'll often be left out on the sidelines while a strong performer keeps performing.

Overconfidence
Finally, overconfidence can be a performance killer. When we're overconfident, we think that we can do better picking stocks and managing them than others. Even if you've got a long-term record of positive gains, a closer look might reveal that you're underperforming the S&P 500 -- in which case you might do well to just keep much or all of your money in index funds. There's no shame in that, and even Warren Buffett has recommended low-cost broad-market index funds for most of us. Some portfolio contenders for you are the SPDR S&P 500 ETF (SPY -0.02%), Vanguard Total Stock Market ETF (VTI 0.07%), or Vanguard Total World Stock ETF (VT 0.11%). Respectively, they will distribute your assets across 80% of the U.S. market, the entire U.S. market, or just about all of the world's stock market.

As you invest in 2016 and beyond, aim to keep your emotions and personality characteristics from hurting your performance. Have a plan, stay disciplined and committed, and be patient.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Amazon.com and Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Amazon.com and Chipotle Mexican Grill. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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