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AAII Survey: Biggest Errors Investors Can Make

Like it or not, we all make mistakes, albeit some are more impactful or costly than others. I just moved to the far west suburbs of Chicago, so I am still learning to get around. That means I am making my fair share of wrong turns these days, which add a few minutes to whatever trip I am making. Luckily, none of these errors has caused me to miss my commuter train, which would have a more significant impact on my day (and mood!).

As investors, we also make mistakes. I can still remember the first investment mistake I made, over 20 years ago: I was selling a stock from an AAII portfolio and somehow I sold it twice, which meant we entered into a short position. Luckily, the stock fell in price and I was able to close the short position with a slight net gain.

AAII Weekly Survey Question

However, many investor mistakes are more costly. for last week’s AAII reader survey, I compiled a list of common investor mistakes (certainly not intended to be comprehensive) and posed the following question:

Which of the following do you think is the biggest error an investor can make?

Here are the results:

In all, 1,945 readers participated.

By a fairly wide margin, the biggest error our readers feel an investor can make is to make decisions based on emotions, with 45% of responses. This is one of the reasons why I am such a fan of quantitative stock screening. By applying a set of filters to the stock universe, you focus only on those stocks that meet those criteria. While following such an approach requires discipline, and belief in the strategy, it greatly reduces the impact of emotions on the decision-making process.

In second place with 34% of the votes was my choice, trying to time the market. I am dismayed by the number of “experts” who claim that they successfully called the last market top or bottom, or even the last few. However, I have yet to come across anyone who consistently, and correctly, has called market turnarounds. I am a believer in investing throughout the market cycle. Yes, 2008–2009 certainly hurt my portfolio, but if I had pulled my money somewhere during that sharp decline, I probably would have missed out on most or all of the rebound that began in March 2009. If you can’t afford a big market downturn, you probably shouldn’t have your assets in stocks. Any money you will need in the next four to seven years, in my opinion, most definitely should be in low-or-no-risk assets.

In third place, with 17% of the votes, was not adequately diversifying. Diversification is a great way to weather market fluctuations, although “black swan” events such as the Great Recession of 2007–2009 push pretty much every sector or industry down. Even so, it is important to spread your risk around and “not put all your eggs in one basket.”

Lastly, only 4% of our readers think that keeping too much cash is the biggest error an investor can make. As people live longer, the risk of becoming too conservative is growing. More and more, investors are advised to hold a decent amount of stocks, even in retirement, to ensure the return required to see them through their retirement years.

Weekly Special Question

In my 20-plus years as an investor, I have learned a lot from my mistakes. I have also learned a lot from listening to the stories of other investors. More than likely, they have made the same mistakes I have made, or mistakes that I could eventually make, too.

As such, I was curious to hear about the mistakes our readers have made. Therefore, last week’s special reader question asked:

What is the biggest mistake you have made as an investor?

In all, we received 260 responses. This was a below-average number of responses, which tells me that people don’t like to admit their mistakes, which isn’t surprising.

The answers ran a wide gamut, but a few trends did develop.

The mistakes cited the most by our readers (15%) was taking too much advice. I have met many investors who say they regret not following their own intuition or research when making investment decisions. While there is nothing wrong with seeking out investment advice, in the end, the decision is yours to make.

On the other end of the spectrum, 10% of respondents say that the biggest mistake they have made as an investor was not using or performing enough research before making an investment decision. That is one of the pitfalls of investing. It requires effort. Investing, whether it be in mutual funds or individual stocks, still requires some level of research.

Rounding out the top three responses, slightly more than 6% of respondents say their biggest mistake an investor was waiting too long getting started.

Other top vote-getters include:

  • Taking on too much risk
  • Being too conservative
  • Letting their emotions get the best of them
  • Sitting on the sidelines

Here is a sampling of the responses we received as to the investment mistakes our readers have made:

  • “Investing in bonds too heavily at an early age.”
  • “Not being patient enough.”
  • “Following financial advisers’ recommendations when they contradicted my own thinking. Reliance on experts’ recommendations must never interfere with what one sees as a profitable or unprofitable investment.”
  • “Buying stocks under $10.”
  • “Doubling down on a bad stock.”
  • “Getting scared out of a holding by market movements.”
  • “Not starting earlier.”
  • “Overconfidence.”
  • “Hiring an investment adviser.”
  • “Selling my winners too quickly and holding on to my losers for too long.”
  • “Trying to be too active in trading.”
  • “Placing too little emphasis on risk.”

Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.

 

One thought on “AAII Survey: Biggest Errors Investors Can Make”

  1. One of my biggest mistakes was deciding NOT to embrace the discipline of SELL IN MAY AND GO AWAY. I was aware of this timing strategy since the late 1980s, but didn’t practice it until the early 2000s.
    My second biggest mistake was being short orange juice futures in the either 1980 or 1979 during a Florida hard freeze.

     

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