Stock Markets in Tur­bulence – a “Trap” for Invest­ment Mistakes

Investment Mistake No. 1: Acting Emotionally

The sharp reactions in stock markets have surprised many. The stock market environment is likely to remain fragile and unpredictable for some time. However, it is crucial to stay calm during turbulent times. Short-term decisions motivated by greed or fear usually do not prove to be good solutions. A common scenario: the stock market crashes, and in panic, all investments are sold at a loss. When the market recovers, many re-enter too late and realise only small gains, if any. In nervous market times like these, it is advisable for investors to seek professional financial advice before taking action.

Investment Mistake No. 2:  Lack of Diversification

A common investment mistake is putting “all eggs in one basket,” for example, investing the entire amount in the shares of a single company. If the share price falls, significant losses can occur, and in the event of the company's bankruptcy, even a total loss. This typical investment mistake can be avoided by spreading the investment amount across multiple asset classes such as stocks, bonds, real estate, money markets, precious metals, or commodities, across various sectors (including pharmaceuticals, consumer goods, industry), and across multiple regions. In technical jargon, this is called “diversified investing.” This is also possible for smaller investment amounts. Suitable instruments for this include Exchange Traded Funds (ETFs) or portfolio funds.

Investment Mistake No. 3: No Investment Strategy

Another classic investment mistake is acting randomly. Instead, it is essential to create an investment strategy based on individual goals, risk tolerance, and risk capacity.

Investment Mistake No. 4: Not Investing

The biggest investment mistake of all is not investing at all. This is particularly true in light of the currently low savings interest rates. Those who leave their wealth in a bank account miss out on potential returns, whose long-term impact is often underestimated – keyword compound interest effect. Those who invest should do so regularly, preferably quarterly or monthly. This usually achieves good average prices.

Investment Mistake No. 5: Stubbornly Holding onto Investments

In principle, it makes sense not to abandon a defined investment strategy at every market twitch. However, common investment mistakes also include holding onto paper losses for too long. This psychological phenomenon is generally known as loss aversion. We are more annoyed about losses than we are pleased about gains. This can lead to not making any investments at all (see Investment Mistake No. 4). As a result, investors usually have less “savings” in the long run due to the loss of purchasing power than with continuous investing. Therefore, it is important not to stubbornly sit out losses but to look to the future. What can help: setting fixed rules for selling from the beginning.

Investment Mistake No. 6: Expensive Investment Strategy

Every investment product comes with annual costs, and costs reduce returns. Therefore, it is worth comparing the costs of comparable investment products. It is advantageous to choose investment products from established providers that transparently disclose performance and costs. However, caution is advised: a more expensive product is not necessarily worse than a cheaper one. Therefore, it is important to look at the net return, i.e., the return after costs, over several years.

Investment Mistake No. 7: Investing and Not Monitoring

Another investment mistake is not performing so-called rebalancing. Investing money in a strategy and then leaving it unseen for several years can be dangerous. Asset classes change over time. For example, the share portion can swell significantly and violate the initially defined individual risk tolerance. This increases the potential for loss. Therefore, it is essential to regularly rebalance the proportions to maintain the desired balance (see box below).

Investment Mistake No. 8: Frequent Trading

This investment mistake is related to Investment Mistakes No. 1 and No. 3. Frequent buying and selling of securities are often motivated by emotional reactions to market fluctuations or due to an unclear investment strategy. For example, buying securities that are currently “en vogue". However, every transaction costs and can reduce returns.

Investment Mistake No. 9: Following Promising “Tips”

Avoid offers that promise “surefire investments” or “super returns.” The general rule is: high return opportunities always come with high risks. It is more promising to determine an investment strategy that matches personal risk tolerance and investment goals. Professional financial advice can help with this.

Investment Mistake No. 10: Only Investing in Familiar Things

This is not about investment instruments. Investors must inform themselves about the opportunities and risks of each investment instrument – this is especially true for structured products with leverage. It is more about, for example, only investing in familiar Swiss stocks. A strong focus on the familiar usually leads to poor diversification and missed opportunities for returns (see Investment Mistake #2).

Additional information on investment mistakes and how to avoid them can also be found in the show Geld (in Swiss German only).