Fidelity recently released a study showing that "forgetful" investors -- or those who literally forgot they had an account with Fidelity -- were the ones who were earning the best returns at the brokerage.
It may sound crazy, but it's true. As the article points out, "nothing gets in the way of returns quite like someone who thinks they have a great idea." Our behavioral tendencies, and the way we're wired to think and react to situations, almost always ends up leading to terrible decisions when applied to the market.
That's why that study found that the investors who forgot their accounts did so well. They simply didn't do anything at all, and therefore removed the riskiest part of investing from the equation: human behavior and emotion.
So what's the average investor to do? In short, stay the heck out of your own way. It also helps if you avoid these 3 bad investor behaviors:
Bad Investor Behavior #1: Putting Your Eggs in One Basket
Cliche, right? Maybe, but overused expressions get that way for a reason. They're often true.
This is another way of saying, "failing to diversify." Choosing all stocks, as an example, leaves your portfolio volatile as you face huge risks. Choosing all bonds may cause you to miss out on opportunities for growth and returns, which means a too-small nest egg in the future.
Yes, these are extreme examples, but the point is clear: a diversified portfolio helps you ride out the ups and downs that are inevitable in any kind of market, in any decade, across all asset classes.
Diversification helps protect you from the risk of losing your whole investment or failing to capitalize on your investment at all.
Bad Investor Behavior #2: Getting Emotional
Emotions will ruin your investments faster than any market will. You must think rationally about your investments and leave your emotions out of the game. And that's exactly why investing is tough for the average Joe.
How are you not supposed to panic when talking heads are screaming about horrible market performance on the TV and radio? Or, just as difficult to ignore and tune out is the coworker bragging about some tech stock he bought for $2 a share that's now worth $200 per share.
Giving into your emotions -- whether they be fear or greed -- is a surefire way to hurt your financial success in the market. It's so tempting because feeding off the emotions and reactions of others is easy; we're susceptible to groupthink. But giving in leads us to buy high and sell low, the exact opposite of what a successful investor should do.
Tune out the noise and if all else fails, let Warren Buffett guide you:
Be fearful when others are greedy and greedy when others are fearful.
Bad Investor Behavior #3: Tinkering
Rebalancing your portfolio on a quarterly or annual basis is one thing. Pulling up your investment accounts and visiting a brokerage website every day to tinker with your investments or to buy and sell is another.
And it's bad news for your wealth.
Start thinking about the long-term, instead of trying to tinker and make judgment calls about what the market will do next. Market forecasting isn't reliable.
You simply can't accurately time the market every single time you contribute to your current assets or want to buy into a new asset. Only buying into the market when it feels good, or selling when it's no longer comfortable, often leads to buying high and selling low.
Not to mention, lots of tinkering -- or buying and selling -- also leads to lots of fees. The more fees you incur, the less you ultimately have in your nest egg.
Instead of tinkering, make regular, steady contributions to your investments over time. Don't worry about what the market is doing, because you're in this for the long haul. Theoretically, what the market does today will be insignificant to your eventual wealth when you look back on this day 40 years from now.
What Should a Good Investor Do?
It's clear what bad investor behavior looks like -- but what about good investor behavior? In general, average investors who achieve success with their finances:
- Keep diversified portfolios
- Understand personal risk tolerance and hold asset allocations in accordance to that
- Don't give into groupthink or herd mentality
- Largely ignore emotional media reports or "hot stock picks!" from the guy in the next office over
- Choose a long-term investing strategy instead of trying to constantly time the market
- Ask for help from a trusted fiduciary when it's needed
- Strive to keep investment fees as low as possible
- Work to continuously increase their financial education and understanding
Want to Show This to a Friend? Use Our Infographic!
XYPN put together a colorful infographic to help show the differences between GOOD and BAD investor behaviors, and how following good behaviors can help average investors boost their returns. Check it out!