The 5 Biggest Mistakes Investors make and How to Avoid Them!

"Self-awareness is the first step toward progress!" as the old adage goes. This is especially true in the case of investment. Because nobody, from beginners to committed amateurs to experts, is immune to expensive blunders in this area. They are all slipping into investment traps where large sums of money are "burned." 

The list of irrational investor behaviors is broad and varied, ranging from the tulip bulb speculative bubble in Holland in the 18th century to the excitement about Internet shares in the 1990s or sticking to pure savings account investment at zero return.

GEWINN has thus polled experts to find out which are the most common investing blunders, why they are so costly, and how to prevent them. The good news is that you don't have to be a Nobel laureate to recognize and avoid these mistakes in the future. The bad news is that you'll need a lot of discipline and patience, akin to successful investors like Warren Buffett or André Kostolany.

Mistake 1: To not invest at all.

Austrians presently hold roughly 260 billion euros in various types of savings accounts. This means that every citizen in our nation, from infants to grandparents, has a "nest egg" of about 29,300 euros. "How much security do you really need?" asks Helmut Siegler, CEO and main investor of Schoellerbank, in light of these substantial reserves: "

Austrians don't think critically enough about how much money they genuinely need for repairs and emergencies, and they're willing to tolerate a significant loss." A worldwide comparison reveals that investors in other nations are far more astute in this country. 

Siegler points out that while private investors in this nation do not have to worry about negative interest rates on savings deposits, inflation is a persistent concern "gnawing away" at the buying power of investments: "With typical inflation of 1.5 to 1.9%, equals 9,000 euros in just six years." This equates to a loss of buying power of around 1,000 euros. And this low-interest rate level is not a passing fad; it will be with us for a long time."

Mistake 2: To regard equities as speculative investments for the near term.

"Equities are quite hazardous. It is only available to experts "is a prevalent misconception. As a result, Erich Stadlberger, Oberbank's Head of Private Banking & Asset Management, does not instantly mention shares while giving lectures or speaking with customers: "I prefer to talk about a stake in a firm." Because everyone wants to own a piece of a successful business. Stocks are only a means to an aim."

In the long term, stocks have been able to earn roughly the same amount as corporations have been able to increase their earnings. "Average yearly returns of roughly 6% for equities before costs and taxes are a reasonable long-term number," the banker reckons.

No loss from 14 years.

If you are patient enough, you can almost never go wrong when investing in stocks. Short-term stock investment, on the other hand, is pure speculation. A one-year investment in the MSCI World stock index, which measures the performance of about 1,600 of the world's top listed businesses, would have yielded between –43.5 and +66.1 percent since 1972, according to calculations by the "Dividenden-Adel" website (including net -dividends). Following that, the chance of a loss steadily reduces, and after five years, the risk-reward ratio of a stock investment becomes quite persuasive.

Despite two oil crises, three Gulf wars, the great stock market crash in 1987, the bursting of the internet bubble, and the great financial and economic crisis of 2007, there has not been a single period since 1972 in which you would have made a loss with a global equity investment - no matter when you got in.

Persistence paid off

For all those who have shown perseverance on the stock exchange, it has always paid off: a 20-year investment in the world stock index would have resulted in an increase of 2.3 percent per year in the worst-case scenario - if you bought in March 1989 and sold at the bottom of the 2009 financial crisis.

"Timing extremely difficult"

Investors who believe that realistic long-term returns of five to six percent per year are insufficient sometimes try to boost returns by purchasing when prices are low and selling when prices are high. According to Stadlberger, this can work well in the short term, but "over very long periods of time, getting the timing correct is really challenging." A few days can be the difference between a long-term gain and a long-term loss."

Mistake 3: Extrapolating the future from the past

It is a trap that even experienced investors frequently fall into security has a clear rising tendency in its price growth, such as the share of the German payment service operator Wirecard: From the beginning of January 2017 to the beginning of September 2018, the share price more than quintupled in a remarkable, nearly continuous upward rise. 

Many investors wanted to get in on the action. However, the expectation that the Wirecard share's development could only be sustained in the future based on prior price development was dashed. The stock dropped drastically, among other things, as a result of charges of balance-sheet manipulation, and is currently trading substantially below its highs.

This is known as an "extrapolation mistake," and it may also occur in the other direction if investors mentally expand a downward trend in the stock market into infinity and so delay much too long before (re)entering.

Mistake 4: Herding

In essence, the herd instinct is a very rational human habit that is firmly embedded in our subconscious and may save lives in emergency situations: In the case of a fire or an explosion, for example, there is frequently no time to coolly evaluate the alternatives for action, but you must be on it and believe that the herd just knows more than you do at the time.

"At the moment, we don't observe herd behaviour in the stock market." The atmosphere is neither too hopeful nor overly negative. In light of the extended bull market, investments in stocks are also below average," says Krämer, referring to the findings of Professor Teodoro D. Cocca, a behavioural finance specialist at Johannes Kepler University Linz who has worked with the Kepler fund for 10 years.

Mistake 5: Overconfidence

Most individuals find it difficult to admit this error, especially when it comes to investing. Because many private investors and experts believe they have "everything under control" with their assets and disregards the accompanying dangers. For example, "overconfidence presents itself in a considerably increased frequency of purchases and sales, as a person continually feels obliged to get active and seize any opportunities that appear," explains Bank Austria's chief analyst Monika Rosen.

In many circumstances, investors assume that they may avoid wide risk diversification by betting on a few well-chosen or even a single "horse." In doing so, individuals are temporarily vindicated by fortuitous hits and instinctively dismiss failures. Overconfidence causes many people to assume that you can always find the best moment to go in and out. "These phenomena appear to be more prevalent in males than in women," Rosen explains.

Modest results

The detrimental implications of financial market overconfidence can be shown in earnings: According to Warwick Business School research, males purchase or sell shares 45 percent more frequently than women, yet earn 2.65 percent less on average. By itself, Rosen claims, "more trading activity has a negative impact on performance."