Investor Education
The 6 Biggest Mistakes Ordinary Investors Make
The 6 Biggest Mistakes Ordinary Investors Make
In many areas of life, we are often our own worst enemies. The realm of personal finance is no different.
What’s the biggest threat to achieving financial independence?
Unfortunately, it’s your own brain.
You can invest in all the right things, minimize fees and taxes, and even diversify your holdings. But if you fail to master your own psychology, it’s still possible to fall victim to financial self-sabotage.
The Brain’s Design
Today’s infographic is from Tony Robbins, and it uses data and talking points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.
The graphic is based on a chapter in the book that reveals the key psychological limitations of the human brain. It turns out that these fallible survival instincts have been hardwired into our brains over millions of years, and they become very troublesome when we try to make rational financial decisions.
To overcome these instincts, investors need to adopt simple systems, rules, and procedures that can ensure the decisions around money we make are in our best long-term interest.
What I’ve found again and again is that 80% of success is psychology and 20% is mechanics.
– Tony Robbins
Six Psychological Pitfalls to Avoid
Remember these six pitfalls – and how to counteract them – and you’ll be able to avoid the biggest mistakes often made by investors.
Mistake #1:
Seeking confirmation of your own beliefs
Your brain is wired to seek and believe information that validates your existing beliefs. Our minds love “proof” of how smart and right we are.
Even worse, this is magnified by the online echo chambers of the modern world.
- News media (MSNBC, Fox News, etc.) tend to favor one point of view
- Google and Facebook filter our search results
- Unsubstantiated rumors can run unchecked, as long as they reinforce existing points of view
This can be exceptionally detrimental in investing.
Convincing yourself that a particular stock or strategy is correct, without taking into account contradicting evidence, can be the nail in the coffin of financial freedom.
The Solution: Welcome opinions that contradict your own
The best investors know they are vulnerable to confirmation bias, and actively ask questions and seek qualified opinions that disagree with their own.
Ray Dalio, for example, seeks the smartest detractor of his idea, and then tries to find out their full reasoning behind their contrary opinion.
The power of thoughtful disagreement is a great thing.
– Ray Dalio
Mistake #2:
Conflating recent events with ongoing trends
One of the most common – and dangerous – investing mistakes is to believe that the current trend of the day will continue.
In psychology speak, this is known as recency bias, or putting more weight on recent events when evaluating the odds of something happening in the future
For example, an investor might think that because a stock has performed well recently, that it will also do well in the future. Therefore, she buys more – effectively buying at a high point in the stock.
The Solution: Re-balance
Our memories are short, so what can we do?
The best way to avoid this impulsive and faulty decision making is to commit to portfolio allocations (i.e. 60% stocks, 40% bonds) in advance, and then re-balancing on a regular basis.
This effectively ensures you are buying low, and selling high. When stocks to well, you sell some of them to buy other assets in the underweighted part of your portfolio, and vice versa.
Mistake #3:
Overconfidence
Very successful and driven people often assume they will be just as good at investing as they are at other aspects of their life. However, this overconfidence is a common cognitive bias: we constantly overestimate our abilities, our knowledge, and our future prospects.
The Solution: Get Real, and Get Honest
By admitting you have no special advantage, you give yourself an enormous advantage – and you’ll beat the overconfident investors that delude themselves in believing they can outperform.
If you can’t predict the future, the most important thing is to admit it. If it’s true that you can’t make forecasts and yet you try anyway, then that’s really suicide.
– Howard Marks
Mistake #4:
Swinging for the Fences
It’s tempting to go for the big wins in your quest to build financial wealth. But swinging for the fences also means more strikeouts – many which can be difficult to recover from.
The Solution: Think Long Term
The best way to win the game of investing is to achieve sustainable long-term returns that compound over time. Don’t get distracted by the short-term noise on Wall Street, and re-orient your approach to build wealth over the long term.
The stock market is a device for transferring money from the impatient to the patient.
– Warren Buffett
Mistake #5:
Staying Home
This psychological bias is known as “home bias”, and it is the tendency for people to invest disproportionately in markets that are familiar to them. For example, investing in:
- Your employer’s stock
- Your own industry
- Your own country’s stock market
- Only one asset class
Home bias can leave you overweighted in “what you know”, which can wreak havoc on your portfolio in some circumstances.
The Solution: Diversify
Diversify broadly, in different asset classes and in different countries. From 2000 to 2009, the S&P 500 only returned 1.4% per year, but foreign markets picked up the slack:
- International stocks: 3.9% per year
- Emerging markets: 16.2% per year
A well-diversified portfolio would have done well, no matter what.
Mistake #6:
Negativity Bias
Our brains are wired to bombard us with memories of negative experiences.
In fact, one part of our brain – the amygdala – is a biological alarm system that floods the body with fear signals when we are losing money.
The problem with this? When markets plunge, fear takes over and it’s easy to act irrationally. Some people panic, selling their entire portfolios to go into cash.
The Solution: Prepare
The best way to avoid negativity bias is to:
- Keep record of why you invested in certain securities in the first place
- Maintain the right asset allocation that will help you through volatility
- Partner with the right financial advisor to offer advice
- Focus on the long term, and avoid short-term market distractions
By failing to prepare, you are preparing to fail.
– Benjamin Franklin
Conclusion
These simple rules and procedures will make it easier for you to invest for the long term.
They’ll help you:
- Trade less
- Lower investment fees and transaction costs
- Be more open to views that differ from your own
- Reduce risk by diversifying globally
- Control the fears that could otherwise derail you
Will you be perfect? No.
But will you do better? You bet!
And the difference this makes over a lifetime can be substantial.
Markets
The 20 Most Common Investing Mistakes, in One Chart
Here are the most common investing mistakes to avoid, from emotionally-driven investing to paying too much in fees.

The 20 Most Common Investing Mistakes
This was originally posted on Advisor Channel. Sign up to the free mailing list to get beautiful visualizations on financial markets that help advisors and their clients.
No one is immune to errors, including the best investors in the world.
Fortunately, investing mistakes can provide valuable lessons over time, providing investors an opportunity to gain insights on investing—and build more resilient portfolios.
This graphic shows the top 20 most common investing mistakes to watch out for, according to the CFA Institute.
20 Investment Mistakes to Avoid
From emotionally-driven investment decisions to paying too much on fees, here are some of the most common investing mistakes:
Top 20 Mistakes | Description |
---|---|
1. Expecting Too Much | Having reasonable return expectations helps investors keep a long-term view without reacting emotionally. |
2. No Investment Goals | Often investors focus on short-term returns or the latest investment craze instead of their long-term investment goals. |
3. Not Diversifying | Diversifying prevents a single stock from drastically impacting the value of your portfolio. |
4. Focusing on the Short Term | It’s easy to focus on the short term, but this can make investors second-guess their original strategy and make careless decisions. |
5. Buying High and Selling Low | Investor behavior during market swings often hinders overall performance. |
6. Trading Too Much | One study shows that the most active traders underperformed the U.S. stock market by 6.5% on average annually. Source: The Journal of Finance |
7. Paying Too Much in Fees | Fees can meaningfully impact your overall investment performance, especially over the long run. |
8. Focusing Too Much on Taxes | While tax-loss harvesting can boost returns, making a decision solely based on its tax consequences may not always be merited. |
9. Not Reviewing Investments Regularly | Review your portfolio quarterly or annually to make sure you’re staying on track or if your portfolio is in need of rebalancing. |
10. Misunderstanding Risk | Too much risk can take you out of your comfort zone, but too little risk may result in lower returns that do not reach your financial goals. Recognize the right balance for your personal situation. |
11. Not Knowing Your Performance | Often, investors don’t actually know the performance of their investments. Review your returns to track if you are meeting your investment goals factoring in fees and inflation. |
12. Reacting to the Media | Negative news in the short-term can trigger fear, but remember to focus on the long run. |
13. Forgetting About Inflation | Historically, inflation has averaged 4% annually. Value of $100 at 4% Annual Inflation After 1 Year: $96 After 20 Years: $44 |
14. Trying to Time the Market | Market timing is extremely hard. Staying in the market can generate much higher returns versus trying to time the market perfectly. |
15. Not Doing Due Diligence | Check the credentials of your advisor through sites like BrokerCheck, which shows their employment history and complaints. |
16. Working With the Wrong Advisor | Taking the time to find the right advisor is worth it. Vet your advisor carefully to ensure your goals are aligned. |
17. Investing With Emotions | Although it can be challenging, remember to stay rational during market fluctuations. |
18. Chasing Yield | High-yielding investments often carry the highest risk. Carefully assess your risk profile before investing in these types of assets. |
19. Neglecting to Start | Consider two people investing $200 monthly assuming a 7% annual rate of return until the age of 65. If one person started at age 25, their end portfolio would be $520K, if the other started at 35 it would total about $245K. |
20. Not Controlling What You Can | While no one can predict the market, investors can control small contributions over time, which can have powerful outcomes. |
For instance, not properly diversifying can expose you to higher risk. Holding one concentrated position can drastically impact the value of your portfolio when prices fluctuate.
In fact, one study shows that the optimal diversification for a large-cap portfolio is holding 15 stocks. In this way, it helps capture the highest possible return relative to risk. When it came to a small-cap portfolio, the number of stocks rose to 26 for optimal risk reduction.
It’s worth noting that one size does not fit all, and seeking financial advice can help you find the right balance based on your financial goals.
Another common mistake is trading too much. Since each trade can rake up fees, this can impact your overall portfolio performance. A separate study showed that the most active traders saw the worst returns, underperforming the U.S. stock market by 6.5% on average annually.
Finally, it’s important to carefully monitor your investments regularly as market conditions change, factoring in fees and inflation. This will let you know if your investments are on track, or if you need to adjust based on changing personal circumstances or other factors.
Controlling What You Can
To help avoid these common investing mistakes, investors can remember to stay rational and focus on their long-term goals. Building a solid portfolio often involves assessing the following factors:
- Financial goals
- Current income
- Spending habits
- Market environment
- Expected returns
With these factors in mind, investors can avoid focusing on short-term market swings, and control what they can. Making small investments over the long run can have powerful effects, with the potential to accumulate significant wealth simply by investing consistently over time.
-
Misc6 days ago
Ranked: America’s Best Universities
-
Technology2 weeks ago
Ranked: Largest Semiconductor Foundry Companies by Revenue
-
Misc1 week ago
Visualized: EV Market Share in the U.S.
-
Maps1 week ago
Interactive Map: The World as 1,000 People
-
Retail1 week ago
Ranked: Average Black Friday Discounts for Major Retailers
-
Business1 week ago
Ranked: Fast Food Brands with the Most U.S. Locations
-
Economy1 week ago
Visualizing 30 Years of Imports from U.S. Trading Partners
-
Markets1 week ago
Ranked: The Biggest Retailers in the U.S. by Revenue