Beware of deadly snakes

Mistakes individual investors make

I’ve made mistakes as an individual investor (overconfidence and market timing, among others). And given my education and professional experiences, I should know better.

An understanding of theory, though, only gets you so far. The biggest mistakes tend to be behavioral and from a lack of understanding financial history and market cycles.

Here are the biggest mistakes I see individual investors make (I’ve learned my lesson on many of these the hard way*):

1) Overestimate risk tolerance

An all/mostly equity portfolio can make theoretical sense for the younger investor. But it is one thing to look at a long-term chart and another to live through your retirement portfolio getting cut in half or more (the S&P declined 49% in 2000-02 and 57% in 2007-09).

2) Chase performance / FOMO

We invest in what’s done best lately (the last year, the last three years), thinking (hoping) that outperformance will continue. Momentum is real but mean reversion is inevitable.

3) Try to time the market

Markets are complex and dynamic systems – even expert practitioners with 30-40+ years of experience cannot time the market consistently. Maybe you’ll get lucky once or twice but much more likely you’ll be too early (miss the upside) or too late (miss the rebound).

4) Under-diversify

Owning a handful of stocks, concentrating in a single sector, or owning a chunk of stock in your employer. Even if they’ve done well lately, you are taking on outsized risk (with no added expectedreturn). Plus, <100 stocks have driven half of returns over time (identifying them with the benefit of hindsight is easy; it is much harder to identify them in advance).

Similarly, having 80-100% of your investments in the U.S. That’s done well lately (but see #2). International diversification is as close to a free lunch as there is in investing.

5) Mistake early success for skill

You bought stocks in March 2020. Now they are up 80-100% and you feel like a genius. Was that skill? Dumb luck? Be honest with yourself and think twice before doubling down.

6) Don’t measure performance

(Almost) everyone makes money in a long bull market. Do you know how you’ve performed over the last 5 years? 10 years? How does that compare to benchmarks?

7) Don’t pay enough attention to fees and taxes

Fees and taxes matter! And they probably add up to a lot more than you think they do. Do you know what you are paying? Lower taxes and fees = higher after-tax after fee returns.


*Experience is what you got when you didn’t get what you wanted.

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