7 traits that lead to bad investment decisions (and how to avoid them)

Success or failure when it comes to investing often comes down to our personal psychological traits, and the way we make decisions, rather than the actual quality of investments themselves.

It’s our state of mind, our emotional wellbeing and personal traits which can either help or hinder our decisionmaking. Just examine the way you “think” about investing and we bet you’ll be surprised by how you’re influenced by a range of different emotions, bias’ and experiences.

Some are good, but plenty are bad. Trying to rectify some of the more damaging traits can dramatically improve decisions and, hopefully, performance. How many of these are you guilty of?

1. Giving in to fear and greed

Investing can be scary… tensions can rise when markets unexpectedly gallop in either direction. Emotions cause you to flee a bear market or plunge head first into a bull market, acting directly counter to the investment adage of buying low and selling high.

Investment history shows that if we counter these emotions completely we’d be infinitely more successful investors. Counter cyclical investing is buying a quality asset which is undervalued in falling markets and selling when it becomes overvalued in rising markets.

It’s not trying to pick the very top of a boom cycle, but being happy to bank good profits and leave something left over for the next investor. Those fear and greed emotions are just so powerful but can be so destructive and often lead us into making irrational decisions.

2. Being overconfident

Making decisions about investing and making money needs confidence. But there is a line… and it’s a very sensitive line.

People with an inflated sense of their own ability to make smart investments often take shortcuts and don’t fully think decisions through. Having the discipline to do all the appropriate, thorough and objective, research before committing, no matter how confident you are, is critical.

All the legendary investors have been renowned for their research and the ability to not go ahead with an investment if its prospects didn’t match their study. It takes courage to overturn a decision when the facts just don’t stack up… but it can save a lot pain.

3. Looking backwards, not forwards

Investing is all about the future prospects of an asset. That it has a bright future and will provide good returns.

As the future is hard to predict we tend to look to the past for some guidance. That’s fair enough but many investors have a bad habit of dwelling on the past, and talking about market developments as if it was obvious what was going to happen.

The reality is that it’s never that obvious, and hindsight can be misleading. It’s better to focus on the current environment and some of the lead indicators providing a glimpse of the future.

The current residential property cycle is a classic case in point. A year ago historic data showed a booming market, particularly in Sydney, leading indicators were strongly predicting a slowdown.

4. Relying to heavily on past patterns

Technical analysis is studying historical market patterns and using them to try and predict the future. As seasoned investors know, making any kind of prediction is impossible.

Yes history is a valueable foundation for investing and determining the credentials of a stock or property. But tracking past price movements to build patterns to predict the future is just one tiny element of a complete assessment.

Fundamental real life aspects… such as trading environment, management, the state of the economy, skill of management etc… are extra layers which need to be added to the analysis.

5. Not admitting a mistake

Whether it be pride, hubris or stubbornness, there’s nothing worse than “marrying a dog”. An investment you were confident would succeed but hasn’t performed, been a disaster but you simply hang on hoping you’ll be eventually right.

As the losses mount you eventually sell but the financial damage could have been significantly less if you’d admitted the mistake and cut your losses.

Objectivity, and understanding you won’t be right all the time, is the key to success. Make the hard calls and move on.

6. Doing mental accounting

Investors often fool themselves into thinking that they’re doing better than they are. It’s human nature. So it’s important to keep track of how you’re doing on paper, not in your head.

It always amuses us, for example, when people talk about how much they make on property deal. When you gently ask them whether they’ve  deducted stamp duties, legal fees, agent’s commissions and council rates from the profit, the penny drops that the transaction costs are substantial.

Yes, profit is the difference betweeen a buying and selling price… but minus costs.

7. Constantly adapting

We all have a natural aversion to change that can get in the way of successful investing. In order to be successful, you need to be able to recognize when things aren’t working, and adapt accordingly.

Nothing ever stays the same. Investment cycles constantly change, politics constantly change as does regulations, management and financial circumstances. These can all provide opportunities but only to those who not only recognise the changes and are able to adapt.

We’re not talking about knee jerk reactions to sudden changes. It’s an ability to embrace an understanding of change and to think of it as an opportunity rather than a threat. Then to adapt an investment portfolio accordingly.

8 simple and effective money decisions you can make TODAY

It’s the little things that make a difference when it comes to building sustained wealth.

The mistake a lot of people make is that they get overwhelmed by big financial decisions. They focus on the big complex issues rather than breaking their finances down into a series of little decisions which can be achieved quickly and easily.

Elite athletes will always say they break the big goals down and focus on the little steps needed to get there.

Here are eight simple financial decisions you can make today which, together, will make a huge difference to you achieving your goals.

1. Salary sacrifice into superannuation

Currently all working Australians have 9.5 per cent of their salary compulsorily contributed to their superannuation plan. Unfortunately it’s not enough and you need to contribute atleast an extra 2.5 per cent to ensure a comfortable retirement.

Start bridging the gap now by salary sacrificing extra contributions in before tax dollars… it makes sense financially and tax wise.

It might not be the full extra 2.5 per cent, depending on your age and other financial commitments, but start the habit now of contributing extra and change it upwards in the future.

2. Start an emergency fund

Would you believe the average Australian household has less than a month’s worth of income in liquid savings. That’s a scary position to be in if financial disaster strikes.

Yes you could go into debt or draw down on your credit card balance, but that is a very expensive exercise. A better idea is to set up a regular transfer from your transaction account into a “rainy day” online account with the aim of building up to about 3-6 months worth of salary.

3. Get your tax under control

Do it right now. That long standing commitment to set up a filing system to store work related receipts and other relevant documents will make tax time so much simpler.

Get some direction from your tax agent, then go to Officeworks or look for a savvy website or app organiser and just do it.

4. Set up overdraft alerts

We hate accidental transaction account or credit card spends. Those little unnoticed expenses which tip your account into the red and immediately slug you a fee.

It’s a budget killer. It may be only $20-30 but it adds up, along with any interest. And why do you need to add more to bank profits?

Go into your online banking and set up alerts on your accounts when balances drop below a certain level. It will be your cue to take care and stop spending. The same goes for regular bill payments.

5. Download your free credit score

Knowing your credit score is bargaining power. A good credit score means you can legitimately negotiate a better deal with financial institutions on a whole range of products.

Banks don’t want to lose good customers and will work hard to keep them. You need to know whether you’re one of the team, so go to www.getcreditscore.com.au now and find out.

6. Always question late payment fees

It’s annoying, you know you’ve done the wrong thing but that doesn’t mean you have to accept it. If one of those unexpected payments has caught you by surprise, pushed you into the red and earned a late payment fee, do something about it.

Ring or email your banker, explain it was unintentional and ask for the fee to be reversed. For good customers they’ll do it… you just have to ask.

7. Identify your no-fee ATMs

Would you believe Australian spend a couple of hundred million dollars in fees each year from simply using another bank’s ATM. You know that $2-3 fee that comes up when withdrawing cash.

Those little fees all add up and can be easily avoidable. Use your smartphone, press your bank’s app and look up where the closest no-fee ATM is and walk the extra few paces to save money.

8. Change the way you shop

For most people shopping is seen as a reward for hard work, something you deserve and are entitled to. Studies show it creates a psychological buzz or high that makes people feel better about themselves.

Unfortunately the real life low afterwards from realising that reward is a waste of money can be a painful financial hangover.

Get into the habit of finding an alternative to shopping to provide that high. It could be exercise or meditation or listening to music. Whatever it takes to break the impulse shopping habit.

Want more free money tips from Kochie? Subscribe to our newsletter!