Lately I’ve been thinking about “mental money mistakes.” These are subtle errors in judgement; basic oversights and miscalculations. Being subtle and easy to miss, they are the kinds of mistakes just about anyone can make, even those who are intelligent and hard-working. Here’s an example:
You’ve probably heard of the phrase “buy low and sell high.” In a nutshell, it means buying a stock when the price is low and likely to rise in value, and then sell when it’s reached its peak but before it starts to fall.
Unfortunately, many investors do the opposite—they “buy high and sell low.” They don’t do it on purpose, of course. They do it because they follow the crowd.
Now, most investors know this already, and they do a good job of avoiding simple “hot stocks.” But that doesn’t mean they’re immune to making this mistake. For example:
- During times of market volatility, following the crowd and getting spooked by the markets altogether … and then missing out on the rally that comes later.
- Speculating in a commodity because that’s what the crowd is doing—like gold, real estate, or cryptocurrency (this has happened on many occasions over the past decade).
- Taking out a second mortgage, buying investments on margin, or engaging in some other type of fancy financial tactics because that’s what they heard on social media or saw on Reddit.
The point is that following the crowd is easy, even for the savviest of investors. It’s so easy to be caught up in FOMO, or the fear of missing out.
To avoid making this mental mistake, follow these easy steps:
- Remember that if something sounds too good to be true, it usually is.
- Whenever an exciting investment idea comes to you, try giving yourself a few days before taking any action. Then, when you return to the idea, you can examine whether it still seems as promising as before.
- Write out a list of investing/financial rules for yourself, like a “Ten Commandments” list for your personal use. An example: “I will never invest in something that I can’t fully understand or explain to others.”
- Always get a second opinion from an independent, unbiased financial professional before making a major financial decision.
