Resolutions for a New Year: Avoid These Five Investing Errors

Warren Buffett has wisely said, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” While we can often learn much about successful investing from seasoned investors, there may also be valuable lessons to be learned by examining the mistakes of others. Here are five common investing errors, extracted from the Top 20 Investing Mistakes from the CFA Institute, and related resolutions to start the year with fresh perspectives:

Error: Focusing Too Much on the Short Term

1. Tune out the short-term noise. In this modern era of connectivity, we are being fed news at a rapid rate and studies continue to show that the news continues to be increasingly negative.1 In periods of market declines, this can often trigger fear, which can cause investors to make rash decisions that may not be in their best interests. According to one study, the annual average loss in returns due to emotionally-driven investment decisions is three percent.2 Resolve to avoid reacting to short-term market movements.

Error: Expecting Too Much

2. Set realistic expectations. Investors tend to have higher expectations than those who manage money professionally. One study suggests that Canadian investors expect an average annual return of 10.6 percent on investments, whereas financial professionals anticipate 6.5 percent, leading to one of the highest expectation gaps globally.2 Consider that the 50-year average return of the S&P/TSX Composite Index (dividends not reinvested) is 5.9 percent.3

After the significant performance of equity markets in 2024, it may be easy to forget that investing requires an understanding that market conditions will fluctuate from year to year. Annual returns often diverge significantly from long-term averages, and maintaining realistic expectations is important. Reasonable return assumptions can help support better decision making, effective risk management and longer-term financial planning.

Error: Not Diversifying

3. Don’t overlook the value of diversification. A well-diversified portfolio is important to achieve an investor’s appropriate level of risk and return. Having too much exposure to a single security or sector can come with risks. Diversification is intended to protect from the downturns that may affect sectors at different times, while also giving access to the best performers. Consider the difficulty in consistently picking individual winning stocks over long periods: only 21.4 percent of U.S. stocks beat the market over 20 years from 1927 to 2020.4

Error: Trading Too Much

4. Don’t try to time the markets. Some investors believe they can predict short-term market movements, which can lead to frequent buying and selling. Studies have shown that the average underperformance by the most active traders annually (versus the U.S. stock market) is 6.5 percent.5 As the CFA Institute notes: “There are two timeframes that are important to keep in mind: the short term and everything else. If you are a long-term investor, speculating on performance in the short term can be a recipe for disaster because it can make you second guess your strategy and motivate short-term portfolio modifications.”5

Error: Not Controlling What You Can

5. Focus on what you can control. While no one can predict the near-term direction of the markets, consider the impact of what is in the investor’s control. Saving is one aspect we can all influence. Building wealth is possible even with a modest income, yet it becomes improbable without a commitment to saving. Contributing just $19 per day to an investing program could lead to more than $1.1 million over 40 years at an annual return of 6 percent. Not a bad outcome for a modest contribution!

As we begin another year, I am here to help keep you on course and limit the impact of these and other pitfalls as we chart the path to longer-term success.

For a visual of the 20 most common investing mistakes, see: https://www.visualcapitalist.com/20-most-common-investing-mistakes/

1. https://www.bbc.com/future/article/20200512-how-the-news-changes-the-way-we-think-and-behave; 2. https://www.visualcapitalist.com/portfolio-return-expectations-by-country/; 3. S&P/TSX Composite Index 1/31/1974 — 1,220.36; 1/31/2024 — 21,021.90; 4. https://www.visualcapitalist.com/20-most-common-investing-mistakes/; 5. https://www.cfainstitute.org/-/media/documents/support/future-finance/avoiding-common-investor-mistakes.pdf