The world of investing is now accessible not only to professionals in the sector, but also to complete novices. Anyone with a computer or mobile device with an internet connection can now find countless investment opportunities, open a securities account, carry out trading operations and much more.
All this might lead one to believe that investing is a simple, risk-free activity that can earn money effortlessly. In reality, nothing could be further from the truth. Investing is always risky and can result not only in the failure to achieve your goals, but also in the partial or total loss of your invested capital.
For this very reason, before starting any type of transaction, it is essential to acquire some basic knowledge and understand the most common mistakes that beginners tend to make.
In addition to this, it is always preferable to avoid doing it yourself and to rely on professionals in the field. For example, you can start investing with Moneyfarm, taking advantage of simplified advice and choosing the investment account and securities that best suit your risk profile and objectives.
Emotion and cognitive biases
Among the most common mistakes made by first-time investors or those who are not professionals in the field are those related to emotional factors.
One of these is the “disposition effect”, i.e. the tendency to sell securities or other types of investments that are performing well, i.e. making a profit, while keeping those that are performing poorly, i.e. making a loss, in the portfolio. Associated with the “heuristic of regret” – avoiding the regret of losing money that would result from selling securities at a lower value without first conducting an objective analysis of the long-term costs and benefits – the disposition effect leads, according to an analysis by Ernst & Young, to a 3.4% reduction in returns.
Well known and widespread among novices – but also among professional investors – are errors resulting from cognitive biases. These include, for example, overconfidence bias, the tendency to overestimate one’s own abilities and skills, which can lead to underestimating risks and making impulsive choices, and confirmation bias, the tendency to seek information that confirms one’s own opinions or beliefs.
Mistakes caused by inexperience
Emotions and biases are not the only mistakes that novice investors are prone to making. As you can imagine, even simple inexperience can lead to mistakes, some of which can be quite serious and cause considerable problems.
Errors caused by inexperience include starting to invest without:
- at least a basic knowledge of the dynamics of investing;
- an action strategy;
- clear objectives;
- an assessment of the level of risk you can take;
- the support of professionals in the sector.
Mistakes due to inexperience also include those that lead to following trends and choosing securities or forms of investment based on simple “hearsay” and market noise.
Lack of diversification
The lack of diversification of investments can also be included among the most common mistakes made by first-time investors.
This is a well-known and widespread strategy, which essentially consists of including securities that are very different in terms of type, reference market, sector, geographical area and so on in the investment portfolio.
The main objective of those who prefer a portfolio based on this strategy is to reduce and control risk.
