Investing is a great way to boost your wealth and help you towards your long-term financial goals. Though, in uncertain times, it’s easy to worry about how your investments will perform, whether you should sell at certain times, and even whether you’ve invested too much or too little.
There are several traits hardwired into the human psyche that can make even the most rational person make poor investing decisions. These often come in the form of behavioural biases, so there are many common behaviours that you should be aware of when you invest.
So, what better way to show these damaging behaviours than the seven deadly sins? While they may not be “deadly” as such, some of these behaviours can have negative effects on the performance of your investments and your long-term financial wellbeing.
Read on to discover seven “deadly” investing sins that you should try to avoid at all costs.
1. Greed
When you’re investing, greed in moderation can actually be a good thing. It drives you forward and keeps you wanting for more, encouraging you to make your money work harder.
Despite this, it’s important not to let your greed grow out of control, as it can hamper your investing decisions.
For instance, when your investments are performing well, it’s easy to take on unnecessary risk to seek the largest profit possible. If you’re too greedy, you’ll always be insatiably waiting for the highs of substantial gains rather than appreciating the returns you’ve already made.
Also, sudden market downturn does happen, and if you’re too greedy and take on too much risk, your portfolio could decrease in value.
When you’ve identified your tolerance for risk, you can create an in-depth strategy for your investing that should help you balance the worries of volatility with the potential for high returns. When you have a plan in place, you can better identify the type of investments that are suitable for your strategy.
2. Lust
Lust in investing can often manifest itself as an unhealthy desire for quick returns. For instance, you may purposefully seek out certain investments that may not suit your investing style or tolerance for risk, such as those that promise high growth or decent dividend yields.
This drive for returns could make you act without thinking clearly, or cause you to make an investment without adequately researching the opportunity first.
A good example of lust manifested in investing is “confirmation bias”. If you hold a strong belief about a particular investment opportunity that you feel passionate about, you could find yourself placing more weight on opinions that match your own. As such, you may only seek out positive information that reaffirms these views.
You should ideally search for information about an investment opportunity that is contrary to your own views, potentially helping you to question your firmly-held beliefs about a particular investment.
By doing so, you could gain a well-rounded view of an investment, potentially giving you the best chance of making a good decision.
3. Wrath
Stock market uncertainty can happen from time to time, and if you have money tied up in investments, it’s understandable to feel worried about the state of the market. When you’re feeling this way, you may think it’s time to sell your investment to cut your losses.
However, it’s important to remember that some of the market’s worst days are often followed by its best.
Indeed, data from CNBC shows that the US stock market’s best day between 2002 and 2022 was 13 October 2008 – right in the middle of the 2008 financial crisis – with a return of 11.6%.
Similarly, the third-best day was 24 March 2020, which was soon after countries around the world entered lockdowns to halt the spread of Covid-19.
You should try and be patient should a period of volatility occur. When it comes to investing, returns are typically long term, so you shouldn’t let knee-jerk reactions affect your investment decisions.
4. Pride
Much like greed, having confidence in your own abilities is great in moderation, but you should ensure that you aren’t being overconfident. For instance, if you believe you’re more knowledgeable about a sector or industry that you actually are, the performance of your investments could be hampered.
One sign of overconfidence in investing is “self-attribution bias”. This is when you attribute your successful investments to your own skill, but any losses to outside factors that were beyond your control.
You may believe your expertise in a particular sector, or knowledge of a certain asset, gives you an advantage. While this may sometimes be the case, it’s often better to make decisions based on any available evidence, unclouded by bias.
At the end of the day, it’s near impossible to accurately predict exactly how markets are going to move, regardless of your experience or knowledge in a particular sector.
If you are overconfident in your own investing abilities, your investment decisions may not be grounded in fact, and you could make a poor decision. For this reason, you should always counter this by drawing from sound market analysis and research.
5. Envy
Envy is another sin that you should try and avoid when you invest. These days, many investors will boast about the performance of their investments. You may feel jealous and attempt to replicate the success of a friend, colleague or online influencer.
A good example of bandwagon investing is the story of GameStop. In short, a highly organised group on Reddit took on Wall Street by promoting and buying up GameStop stock, which in turn increased its share value considerably and even forced hedge funds to close their short positions and lose billions of dollars.
GameStop has since been labelled a “meme stock”, and while a relatively small group of investors may have made money from the company’s rise, many saw this, jumped on the bandwagon and invested in the company at inflated prices.
Many investors then lost money when the GameStop’s share price dropped. The below three-year graph, which was sourced from Yahoo Finance, shows GameStop’s rapid growth, and subsequent drop:
Generally, you should avoid “bubbles” whenever possible, as bubbles are usually destined to burst.
6. Gluttony
Gluttony is the sin of over-consumption, and as you may have guessed, there’s a fine line between having clear investment goals, and wanting to get rich as quick as possible.
You shouldn’t treat investing as gambling, or entertain “get rich quick” schemes. If you’re gluttonous, you may even find yourself putting too much of your wealth into investments rather than keeping some back for emergencies or to cover day-to-day expenses.
Instead, it may be wise to think of investing as a journey that progresses slowly over time and not expect huge returns immediately. It may be prudent to hold some money back for emergencies, too – even though you may think that you can earn higher returns by investing all of your money, you need to be financially prepared for anything.
At the end of the day, it’s about balancing your own financial situation with your future aspirations and investment goals.
7. Sloth
As previously mentioned, the market can often reward inactivity, so you may be wondering how sloth, the sin of laziness, could be a bad thing when you’re investing?
Well, even though the market often rewards those who stay invested, this doesn’t mean you should be completely complacent. One result of being too “lazy” with your investing is the “status quo bias”.
This is when you tend to choose the option that extends your current circumstances, rather than changing things up when the time is right. It’s understandable to be sceptical of change – making decisions is stressful, especially when your hard-earned wealth is on the line.
Even though it’s tricky to know when you should take action or stay the course, speaking with a financial adviser regularly may be wise. By doing so, you can regularly review your financial circumstances, helping you to invest accordingly.
Get in touch
There are many biases and pitfalls that are easy to fall victim to when you’re investing. We can help you avoid these investing mistakes and ensure that your investments suit your current financial situation.
Please email enquire@london-money.co.uk or call (0207) 808 4120 to find out how we could help you.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.