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  • Investing pitfalls

    Investing pitfalls

    The stock market is at all time high. My portfolio returned 20% this year:

    This is a great time to review a few behavioral pitfalls related to investing, especially when the stock market is at all-time highs. 

    I understand that this might seem like a “boring” topic, but it’s extremely important if you want to succeed with investing for the long term.

    Let’s dive into some of these pitfalls:

    Herd behavior

    I see this all the time with bull markets. Herd behavior is an instinct that causes people to mimic the actions of their friends, family, colleagues, and social media, rather than deciding independently based on their own information.

    Currently, everyone talks about Nvidia. Colleagues at my Fortune 200 company, friends, even my barber! You might think, “Everyone is buying it, I should invest too.”

    The problem is that herd investors often don’t have a good investment plan and listen to market noise.

    This is when having a plan is important. For example, I personally invest in $VGT. It holds 321 different stocks, and 14% of the fund is already invested in Nvidia:

    So, there is no need to go and buy the individual stock. Similarly, if you invest in the S&P 500, like $VOO, 6% of the fund is invested in Nvidia!

    Regardless of what the current “popular” stock is, chances are you are already invested in it indirectly through retirement accounts or ETFs. Always think for yourself and stick to your investing strategy. Don’t just buy stocks because someone mentioned them. If you are curious about my investment strategy, check out my recent newsletter.

    Recency bias

    Recency bias is the tendency to draw conclusions about the future of an investment based only on its recent past.

    You might look at a stock, say Nvidia, and see that it returned 200% in a year. Some people might think, “Wow, it did so well, I should buy it.” But the past doesn’t predict the future. This often leads to people buying high and selling low when their investment doesn’t meet their expectations.

    Zoom can be a great example of that:

    During 2020, the stock went from $60 to $500, and everyone was buying it. Then, over the past five years, it dropped off. Meanwhile, the S&P 500 returned 85% while Zoom achieved -42%.

    The past is irrelevant. What matters most is 3-5 year growth. This is why I invest in ETFs. Let the fund managers do all the research.

    Confirmation bias

    Confirmation bias is the tendency to seek information that confirms our existing opinions and overlook or ignore information that refutes them.

    For example, when researching a stock like Nvidia, you might find articles titled “Why you should buy Nvidia.” Most likely, all the talking points would be something positive about the company. 

    In this way, you would miss information that presents a different perspective on that specific stock. So, we inadvertently look for information that supports our belief and miss information that presents different ideas.

    This one-sided view can result in a poor investment choice. If you are researching a stock, make sure you go deeper than a few articles. If you don’t know how to value a stock correctly, S&P 500 ETFs are a great option to start with!

    By the way, do you want to see specific content? Reply to this email and let me know your suggestions! 

    See you next Saturday.

    MC, CPA

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