4 mistakes investors make that cost them money in the long run

  • There are several common mistakes investors make that cost them money, according to Burton G. Malkiel, author of "A Random Walk Down Wall Street." 
  • Investors often overestimate what they know about investing, and think they can beat the average market return — even when that's difficult for professionals. 
  • Many also get frustrated by a lack of control, but overlook the fact that they're able to control what they buy and when they sell.
  • Following trendy investment advice, and focusing too much on losses, can also hurt investors' returns.
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Investing isn't always simple —there's far more to it than simply buying and selling stocks. 

There are ups and downs in the market, and there can be a lot of emotions involved, too. While growing money is the goal, investors sometimes stand in their own way. 

In his classic personal finance book on investing, "A Random Walk Down Wall Street," author Burton G. Malkiel argues that a simple buy-and-hold investing strategy is best.

In a chapter about behavioral investing, Malkiel outlines several ways that investors hurt their own chances of making money. Here are the four ways he says investors hold themselves back.

1. Overestimating your ability, or thinking you can beat the market

"Many individual investors are mistakenly convinced that they can beat the market," Malkiel writes. That's an unrealistic expectation. 

Even professional investors rarely beat the market, or make better than average returns. "In the investment community, it's common knowledge that actively-managed investment funds typically underperform compared to popular market benchmarks like the S&P 500," writes Insider contributor Eric Rosenberg. "Investment professionals who spend their full-time job trying to beat the market usually can't." 

Rosenberg reports that about 88% of actively-managed funds didn't beat their benchmark, which can make it difficult to reach long-term financial goals. Malkiel writes that overestimating ability can lead investors to "speculate more than they should and trade too much."

2. Thinking you can control the market

"I meet investors every day who are convinced that they can 'control' their investment results," Malkiel writes. And largely, he says, that conviction is an illusion.

An individual can't control their investments' value. No matter how consistent past returns have been, the future could always look different. While that's disconcerting for many investors, there are two things you can control: what you buy, and how long you hold onto that investment and let it ride out the ups and downs.

When you're invested properly, there's no need to control anything. On the whole, the market tends to increase over time. Historic data shows that the S&P 500 index — an index that includes the 500 largest companies in the US across various industries — increases an average of 13.2% every year. While the past doesn't always predict the future, the more varied your investments, and the longer they're invested, the less you'll have to even think about controlling anything.

3. Following the crowd

Following trendy investment advice and chasing hot new stocks isn't the best way to invest — the less glamorous, slow-and-steady approach is best. However, that's not how most people talk about investing.

Malkiel writes that a group-think mentality sometimes influences investing, where people are more likely to take an action they wouldn't when a group is doing it. When people start talking about serious downs in the markets, some investors are swayed to sell off funds, and vice versa.

"Although long-run returns from the stock market have been generous, the returns for the average investor have been significantly poorer. This is because investors tended to buy equity mutual funds just when exuberance had led to market peaks," he writes. 

A prime example of this type of group-think in investing was during the tech bubble of the early 2000s. "During the 12 months ending in March of 2000, more new cash flow went into equity mutual funds than during any preceding period. But while the market was reaching troughs in the falls of 2002 and 2008, individuals made significant withdrawals from their equity investments," he writes. A study later found that the average investor who participated in this trend may have lost  5 percentage points on their average market return.

Following the crowd's consensus rather than your own investing plan can spell trouble.

4. Fixating on short-term losses 

Oftentimes, the biggest fear around investing is the potential for loss, especially in the short term. "People's choices are motivated instead by the values they assign to gains and losses," Malkiel writes. "Losses are considered far more undesirable than equivalent gains are desirable."

While everyone's ability to tolerate risk with investing is different, investors focus too often on short-term losses rather than long-term gains. When markets go down, many investors find it hard to stay the course, stay invested, and stick to their plans. Malkiel concludes it's because the loss is far more painful than the gains are exciting.

Losses in the short term don't necessarily mean long-term failure. And being too worried about your loss potential is likely a sign that you're invested too aggressively. There are ways to invest more conservatively, and doing so might be a smart move if you're worried about your portfolio.

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