WHY WE DO THE THINGS WE DO :
INDUSTRY INSIGHT
WEALTH MANAGEMENT
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WHY WE DO THE THINGS WE DO :
A LOOK AT THE REASONING BEHIND COMMON INVESTOR MISTAKES
Provided by RBC Wealth Management and Eric A . Gregory , CFP ®
Most of us have made an investment mistake of one type or another . While you can ’ t avoid all investment errors , you can learn from those you ’ ve made – and benefit from that knowledge .
By far , one of the most common and costly mistakes involves hanging on to a losing stock or investment . There ’ s a very human tendency to believe in stories of big comebacks in which someone is knocked down but rises back to the top . That sentiment is how many investors look at a losing stock they own . Psychologically , it hurts to recognize you ’ ve lost some of the money you invested . But there ’ s a cost as well to hope against hope that the loser will become a winner . You could be better off selling the losing stock and putting the proceeds into an alternative investment that appears likely to have better returns .
While a lot of investors don ’ t want to realize a paper loss , some do the exact opposite – they avoid a realized gain because they want to avoid its tax consequences . That disdain for paying taxes can lead to holding on to investments too long . By that time , the drop in value could be greater than what they would have paid in taxes on the gain . Also , letting taxes drive their investment decisions means that their portfolios can become distorted , too heavily weighted in the stocks they don ’ t want to sell due to tax worries .
Other times , investors simply maintain a false sense of diversification . For example , investors who hold several different mutual funds may consider themselves fully diversified . However , if those mutual funds have identical investment objectives – say , three different mutual funds that all focus on small-cap growth companies – they ’ re not providing that intended diversification . In that case , the investor could gain diversity by converting one of those funds to a large-cap fund with a focus on value stocks and a mid-cap fund that seeks both growth and value stocks .
Everybody wants a piece of a shining star , and many investors catch a news bite or see a company ’ s stock highlighted in the media and figure it ’ s the next hot stock . As they hear more and more about it from various
sources , investors may feel confident enough to buy . But chances are , by then it ’ s probably too late . A stock that ’ s a media darling most likely has already had a lot of expectations built into its price .
Another big mistake investors make is buying a company after a sudden price drop . To many investors , a cheap price equals a good deal . They don ’ t look past the market price of a stock to determine its relative value . And chances are a recent , precipitous plunge is likely the result of a significant change of circumstances in the company .
In life , some people are always looking for the next best thing or the greener pasture . For investors , the tendency to look for and trade into the next best investment can lead to excessive trading . The churn effect on investing can represent another costly investment mistake and can significantly impact any gains on the investments .
While we can ’ t cover all investment errors here , these are some of the most common and costly , and why investors continue to make them . As the saying goes , “ Those who do not learn from their mistakes are doomed to repeat them .” Sometimes knowing where you went wrong keeps you from going wrong again .
This Industry Insight was written by Eric A . Gregory , CFP ®.
This article is provided by Eric A . Gregory , CFP ®, a Financial Advisor in the Southpointe office at RBC Wealth Management . The information included in this article is not intended to be used as the primary basis for making investment decisions . RBC Wealth Management does not endorse this organization or publication . Consult your investment professional for additional information and guidance .
RBC Wealth Management , a division of RBC Capital Markets LLC , Member NYSE / FINRA / SIPC ( 11 / 12 )
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