What are the biggest behavioural mistakes that reduce an investor’s long-term returns?

There are three broad behavioural mistakes that can seriously damage investor outcomes.

1. Chasing rear-view returns.

A fund, sector or theme performs extremely well. It starts appearing everywhere. Friends discuss it, social media discusses it, and eventually it starts feeling obvious that you should own it.

But by the time something becomes universally attractive, a meaningful part of the strong performance may already have happened.

The investor ends up selecting investments based on where returns have already occurred rather than what role the investment should play in the portfolio.

2. Panicking during short periods of pain.

A one-year correction looks insignificant when you later view it inside a 20-year chart. But when you are actually living through that year, the experience is completely different.

Markets are falling. Your portfolio is red. Every headline is negative. You start questioning the investment and feel compelled to stop your SIP or switch funds.

That action can convert a temporary decline into a permanent loss because you no longer participate in the eventual recovery.

3. Confusing activity with intelligence.

Today investors have constant access to portfolios, market prices, news and opinions. That creates a strong desire to do something.

Stop an SIP. Start another one. Switch funds. Buy a new theme. Sell something. Rebalance again.

Activity creates the feeling of control, but it does not automatically create a better outcome.

Sometimes the intelligent action is actually to avoid unnecessary action and allow a sensible portfolio to continue doing its job.

A lot of wealth is not destroyed because the investor chose a terrible product. It is destroyed because the investor repeatedly interrupts a good investment journey.

“Money is not only lost by investing in bad products. A lot of money is also lost by investing badly in good products.”

“The third mistake is confusing activity with intelligence.”

This is not personalized investment advice. Your goals, risk tolerance and financial situation may be different, so assess your own situation and discuss it with your financial advisor.