Whenever there is money involved, there are always traps youâll want to avoid. Knowing about these traps beforehand can make them much easier to recognize. The traps in this article are all psychological in nature, so they apply to everyone.
Avoid the following traps and youâll be a much more successful investor:
- The sunk cost trap is primarily caused by pride. With this trap, the investor is attempting to protect his previous decision. For investments, there is more at stake than just pride, however. Sometimes itâs necessary to just take the loss and move on.
- If your investment turns out to be a real dud or is dropping quickly, the sooner you can get out, the better.
- Some stocks can take a decade to recover. Some never recover. Move on when the time comes.
- Another trap is confirming a poor investment with the person who provided the initial advice. If youâre questioning the quality of an investment, the worst person to get reassurance from is the person who first suggested the stock.
- Donât fall into a codependent investing relationship. Thereâs no value in mutually confirming a bad decision to each other.
- Misery loves company, but you donât have to fall into this trap.
- Seek out an objective source of information to make a wise decision.
- Avoid letting friends and family lead you astray. Limit the amount of influence your friends and family have over your investment decisions.
- Your brother doesnât necessarily know anything about the stock market or municipal bonds simply because heâs your brother.
- Only allow others to influence your decisions to the extent they have proven their expertise in this area. It can be challenging to handle friends and family when it comes to money. Be smart.
- Freezing is a bad thing. Youâve probably heard that there are 2 basic responses a human can have when threatened: fight or flight. But there is actually a third: freezing.
- Do you find it difficult to take action when things are going badly? When there is a challenge, itâs best to make a thoughtful decision and act on it. Don’t wait until it’s too late.
- Be flexible. Many people believe the first thing they hear without letting their opinion evolve.
- For example, consider the lowly egg. Most of us were brought up to believe that whole eggs are unhealthy. However, even though there is now research to support that eggs are extremely healthy, youâre probably still hesitant to eat too many eggs.
- The first thing you hear isnât necessarily the most accurate. Be open to all information that’s available. If they were wrong about eggs, consider how many other things you believe that might also be inaccurate.
- Avoid overestimating your investment acumen. Many individuals want to believe they can out-think the experts.
- The truth is that many self-proclaimed “experts” are nothing more than people who have done a great job of marketing themselves. So you might be able to do better than these people, but itâs wiser to do your research and seek out true experts.
- A good financial advisor is a true expert that spends all day looking at investments and frequently has access to information that the average investor does not.
- Many investors have piddled away a fortune because they were certain they knew better than everyone else. Maybe youâre a financial genius, but can you afford to risk it if you’re not?
Human psychology is a tricky thing. Itâs easy to fall into these traps and watch your investment portfolio take a serious hit. When the situation becomes heated, youâre much more likely to fall victim to yourself.
The solution is to be open-minded and honest with yourself regarding your investments and seek the advice of experts.