#36 The biggest pitfalls when investing

Two of the most common mistakes are overconfidence and blind trust in your gut feeling. Both behaviors are deeply rooted in us and often cause rational decisions to take a back seat.

Overconfidence: Excessive trust in one's own abilities

Overconfidence is a phenomenon that occurs in many areas of life – including investing. A classic example: if you ask drivers whether they belong to the top 30 percent, an astonishing 80 percent will answer «Yes». This exaggerated assessment of one's own abilities can also be observed in investors.

Many believe they can beat the market and consider their own investment decisions to be superior. If a share price rises after a purchase, we are quick to ascribe this success to our abilities. However, if the price falls, external factors are blamed. Research shows that developed capital markets are generally very efficient. This means that all available information is already priced into the market, making it difficult for even professionals to consistently outperform the market.

A portfolio may consistently reflect personal convictions and market expectations. For example, one conviction may be that the USA is a particularly liberal country due to its history, culture, and constitution and will therefore continue to have a very high level of productivity in the future.

However, it is important to remain aware that your own market expectations are also subject to a high degree of uncertainty. If you place more trust in your own market expectations than is humanly possible, you will waste your risk budget on pointless individual bets. The portfolio is then no longer well diversified.

Gut feeling: Intuition as a risk factor

Intuition plays a significant role in many areas of life and often gives us instant orientation. However, when it comes to investing, blindly trusting your gut feeling is a common mistake. Emotions such as fear and euphoria have a strong influence on investment behavior and can lead to impulsive decisions.

Markets are inherently volatile, meaning that they fluctuate constantly. These fluctuations trigger emotional reactions in many investors. Profits typically generate euphoria, causing investors to increase their equity allocation in the hope that prices will continue to rise. Conversely, fear of further losses after a market decline regularly leads to the selling of equities. These emotion-driven actions are problematic because they increase the risk of realizing losses and missing out on market recoveries.

In addition, active trading and constant portfolio rebalancing cause high transaction costs, which reduce returns over time. It is therefore important to remain calm and not to react hastily in volatile times.

How to avoid these pitfalls

The solution lies in realizing that investments are long-term decisions that should not be guided by short-term emotions or excessive self-confidence. The first step is to create a portfolio that suits your risk capacity and risk appetite. An online wealth manager can easily determine your risk tolerance with you using a simple questionnaire.

Once the portfolio has been set up, an automated deposit plan can help you invest regularly and independently of current market conditions.

What behavioral or thinking mistakes have you encountered when investing yourself? Send me an email about your experience.