"Experience is the name everyone gives their mistakes," author and poet Oscar Wilde once wrote. And how right he was. But what if we could gain the benefit of our errors without having to pay a painful price?
That's exactly what we are tackling in this installment of Investing 101, as we identify behavioral mistake that will will cost you money. To do so, we contacted Lou Harvey, president and CEO of Dalbar, a Boston-based financial services research firm, who has studied and written about the matter for years and has compiled this list of the five biggest behavioral blunders.
1) Mental Accounting
As Harvey describes it, the hallmarks of this investing mistake are erratic behavior and an ever-changing risk tolerance. If you're the type of person who takes big risks in one area but takes almost none in another, you might be suffering the effects of mental accounting. In Harvey's words, it's like conceptualizing different buckets for risk, but then putting all the buckets in the same pool.
2) Herding, Following the Crowd
It's often stated on Wall Street that the market rarely rewards the masses or that stocks always take the course of inflicting maximum pain. "The crowd often is mistaken," Harvey says, "and very often late, too." The problem with being a follower, he says, is that the leaders — whether going in or out of an investment — typically make all the money. "The people who come afterward miss out," he says.
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