Yahoo Finance 5 Reasons Why You're Bad at Investing
Every generation has its share of would-be stock market traders hoping to strike it rich.
There have also been more than a few people with dreams of being astronauts, race car drivers or Olympic gold medalists. Those would-be sportsmen and sportswomen have a lot in common with wannabe top-level traders.
The chances you'll successfully make it in either field are slim.
There are millions of people who play sports in high school, but by the time you get to the winning teams at the top of the professional league the number is down to a tiny few, says Barry Ritholtz, founder and chief investment officer of Ritholtz Wealth Management in New York.
"The parallels to trading are very similar," he says. "It's just so hard to do."
[See: 6 Reliable Dividend Stocks Paying Out for 100 Years or More.]
Here are five factors that are working against you as an investor. If you recognize these traits, you're one step closer to becoming a better investor.
Lack of discipline. The most important thing about trading is not what you read in books, but rather how you react to events.
"You need to have a disciplined check on your emotions and a methodology for doing things," Ritholtz says. "Most people lack that discipline."
Checking your emotions is even more important than having the ability to reading the stock market and dive into earnings reports -- skills that can be taught relatively easily. Traders shouldn't be led by emotion because, as is well documented, their visceral reaction will more than likely lead them to do exactly the wrong thing at the worst possible moment.
For instance, many traders have a rule that when a trade loses 15 percent of its value then it is time to exit the position. That can be emotionally hard to do, because doing so is an overt action whereby you have to admit to yourself that you made a losing trade.
Yet it is that discipline of quickly leaving mistakes in the past that distinguishes the superstars from the "also-rans."
Likewise, investors are more likely to want to sell stocks after a huge event that creates market volatility, such as a terrorist attack. But a smart trader will stand firm, or perhaps even buy more as the market dips.
[See: 10 Great Ways to Buy Emerging Markets.]
You don't stick with the plan. Such emotional responses also adversely affect long-term investors.
"We always talk to clients to have have consistent plans throughout market cycles but they often let a barrage of negative news disrupt their plans," says Brian Levitt, senior investment strategist at Oppenheimer Funds in New York.
"What a lot people miss is that the world is a better place now for most people on the planet than it has ever been," he says.
Most people have an entirely human response to letting bad news spur them into wanting to sell stocks in favor of a safe haven, such as bonds. Whereas, collectively and over the long term, experienced traders focus on economics and earnings, which across the world are far better than they were half a century ago.
You aren't that good. Anyone who has heard the radio show "A Prairie Home Companion," knows that all the children are above average in the fictional town of Lake Wobegon.
In the real world, of course, not everyone can be above average, whether they are children, stock traders or driving a car. Still, it is surprising that when people are asked about their driving skill, more than half will usually say they are better than average.
The ability to self-evaluate is very hard, Ritholtz says. But it is important, especially so for traders to learn and get better in their business.
Too focused on ideology. Sometimes traders lose sight of what works instead focusing on what they think should work.
"When hedge fund managers have a hard time sustaining great profits it's often a lot to do with clinging to an ideology," says Keith McCullough, CEO of Hedgeye Risk Management in Stamford, Connecticut.
An example of clinging to an idea for too long was the belief that gold would rally as the Federal Reserve started its money-printing programs known as quantitative easing. The idea was simple: The Fed's programs would cause inflation and create investor demand for gold bullion, like that held by the SPDR Gold Shares (GLD) exchange-traded fund.
It didn't quite happen that way. Starting in 2011, the dollar rallied against major currencies, and because gold is a dollar-denominated asset, its price fell from an all-time high of more than $1,900 an ounce to $1,348 recently.
It was a tough price to pay for being wedded to a bad idea.
You don't learn from your mistakes. "I've screwed up in every way in this business," McCullough says. "But if I have to learn from the same mistake twice then I haven't done my job."
[See: 7 Stocks to Buy When a Recession Hits.]
That's something that everyone, trader or not, should try.
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