Five bad investor traits – and how to correct them

Many people like to think they have the character to be successful investors. The reality is that many also unconsciously have the traits that make them bad investors, which can be a source of investment losses.

Financial advisors are in the position to help investors identify their bad characteristics proactively and to protect them from themselves. This type of behavioural coaching is one of the most important value-added services advisors can provide.

Here are five bad traits to watch out for and steps to address them:

INVESTORS WHO TAKE STOCK MARKET RETURNS PERSONALLY

There are investors who think the stock market is out to get them. When their investments lose money, it’s the market’s fault, not their own. However, when their investments produce a large return, it’s because they’re geniuses. The reality is that the stock market doesn’t care about feelings, life goals and opinions. For advisors who see investors get heated and complain about how the market hates them, make sure you remind them that it’s not personal. This advice may sound a bit simplistic, but it’s not.

INVESTORS WHO JUMP ON THE BANDWAGON

There are investors who always talk about the “hot stock” or the “hot sector” in the markets. They constantly want to chase these securities in the hopes of hitting a “home run.” Sadly, running after the hot stock rarely results in getting rich – and there are numerous examples in Canada’s past to highlight this theme. (Think Nortel Networks Corp., Bre-X Minerals Ltd., etc.)

Rather, the combination of patience, diversification and a long-term timeline tends to be the best approach to create wealth. It may never make investors feel like they’re taking part in the “hot new investment,” but it works.

The best way to for advisors to help investors with this is to remind them how some of these “hot stocks” ended up in the past. The thrill-seeking investor will likely reply with the inevitable argument of, “Yeah, but this time, it’s different.” Reminding them that it’s rarely different – and that their approach to the stock market should be from a place of humility – can go a long way.

INVESTORS WHO PARK THEIR MONEY IN CASH INDEFINITELY

There are countless examples of people who got scared of the market after a crash, liquidated their positions, kept their money on the sidelines during the rebound and then waited for a correction to buy back in. The reality is that it’s not easy to deploy cash in a correction. When those happen, cash will feel like a nice security blanket – and so, these investors will wait it out, but never actually get back in to the stock market.

Many investors who have been sitting in cash since 2008 have missed enormous returns since – and that’s what hurts the most. Investors need to understand that the biggest risk they face is not losing money; rather, it’s not having enough of it, and staying in cash tends to amplify this problem.

One of the best things advisors can do to help with this behaviour is to show investors the impact of their heavy cash allocation on their ability to reach their life goals over time.

INVESTORS WHO TRY TO TIME THE MARKET

Timing the market is extremely difficult to do because you need to be right twice. It’s hard enough to figure out when you need to get out, and it’s often close to impossible to know when you need to get back in.

There are countless examples showing how attempts to time the market is a fool’s errand for most investors – and believing that they can do it is one of the worst characteristics they can have. For advisors who have clients looking to do just that, the table below provides some evidence on why they should not attempt this as missing just a few days can have a significant impact their returns.

INVESTORS WHO DON’T KNOW WHY THEY ARE INVESTING

Ask people why they’re putting money into investments and many will simply say, “because I have to.” I always sympathize with people who say this because nobody teaches us about good money habits and establishing wealth goals in school.

Not knowing why you’re putting money aside is probably the most dangerous trait an investor can have. Why? Because if you don’t have set goals, then it tends to be difficult to find the discipline to stay invested during the market’s inevitable ups and downs. Advisors who establish a financial plan with their clients that have specific goals in place are doing a tremendous service. That’s because they’re helping investors build the necessary foundation to protect them from themselves.