How to avoid common investment mistakes
There is a lot of research carried out into investors, their returns achieved and how they make decisions. The various studies consistently show that, on average, independent investors perform worse than a benchmark (such as the AEX index). There are a few common investment mistakes that are a major cause of these lower returns. In this article, we discuss some of the mistakes many investors make. We also discuss how investing in land can be a good way to avoid investment mistakes.
Causes of investment errors
It has long been assumed that investors base their decisions on rational considerations and choices. That they go through the step-by-step process in which they seek information, list the alternatives and then proceed to buy or sell. In practice, however, this is not how it works. Decisions are often made intuitively rather than based on careful consideration. Decisions (and not just investors’) are often influenced by the decisions made by others. We compare our situation with that of others around us. When many people around us start investing, we quickly assume that it is apparently a good time to do so too.
We call this social comparison. But we also know this by the term herd behaviour. And it can lead to making investment mistakes.
Fear of loss
It makes sense that investing households are keen to avoid losses. Research shows that a potential loss weighs twice as much as a potential gain. In other words, losing €100 in the stock market hurts as much as the pleasure derived from a profit of €200. This loss aversion, or fear of loss, means that investors who are affected by it will only be willing to lose €100 if there is a possible €200 gain in return.
Two common investment mistakes
The two causes described can lead investors to make mistakes. We will briefly consider two common investment mistakes.
Trading too frequently
Active investors regularly make this mistake. This is a group that tries to achieve higher returns than the stock market as a whole, or finish higher than an index (such as the AEX). Active investors scour the stock market, looking for bargains. This leads to many buy and sell orders and therefore transaction costs.
In practice, active investors often take profits (and sell) too soon, but wait too long to sell shares for fear of losses.
An important way to avoid high transaction costs is to opt for a passive investment strategy. This is also known as ‘buy and hold’. Invest in shares and alternatives that can also lead to nice returns in the longer term. With this in mind, investing in land is definitely worth considering. Returns have been consistently good for many years and land is only available in limited supply. You can read more about the benefits of investing in land in this article.
Insufficient spread
A lack of diversification in an investment portfolio can be driven by the decision to invest only in well-known companies. Or following the choices made by others around them. It makes investors feel safe to invest in companies they know. But it very easily leads to a poorly diversified portfolio. For instance, only buying the shares of well-known Dutch companies leads to an unsafe, high-risk investment strategy.
A good investment portfolio is well diversified. Not only diversified in terms of different types of companies, but also diversified in terms of risks.
For instance, equities represent a higher risk (coupled with the chance of higher returns). Bonds, real estate and land form the safe part of the portfolio. Real estate is the subject of political discussion. Returns on real estate, such as rental income, will be taxed more heavily from 2023. Profits from land, such as the proceeds of sale, remain tax-free for now.
Are you interested in the possibilities of including land in your investment portfolio? Make an appointment, free of commitment, with one of our advisers.
