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RP: Investors would achieve better outcomes if they simply focused on avoiding mistakes.
Joachim Klement has written a book on the mistakes investors commonly make.
A helpful analogy, he says, is the game of tennis.
JK: If you go to top class tennis – you watch Roger Federer and Rafael Nadal play with each other – the better man wins, in the sense the better man who has more winners in the tennis match. However, if amateurs like us and if the broad audience like us plays tennis, it’s not necessarily who has the best winners and the best serve and the best returns who wins the match, but the one who makes less mistakes.
And the same thing is true for investing; if you go to the absolute elite level of hedge fund managers and top fund managers, there it is about finding the best stocks, picking the winners, but for most of us we can actually improve our performance much more if we just avoid the worst mistakes that cost us a lot of money.
RP: So what’s the biggest mistake of all?
For Joachim Klement, it’s having a short-term focus.
JK: We all have tendency to look at the markets all the time, to look at our investments and then follow the news more and more closely, and that tempts us to react to short term developments, if the stock is for example down by a couple of percentage points, because of some news item, whether it’s an economic effect or something the company has done, we tend to get panicked, sell it, and then buy something else. Or, we’re maybe lucky with some investments, want to cash in with a ten percent gain, and then buy something else.
Well, the problem with both of these things is that on the one hand it increases trading costs, because you have to pay commission – even in our twenty-first century world these commissions are very low, they still add up. But also, we tend to actually sell the wrong stocks at the wrong time, mainly, take profits too soon and don’t let our winners run, and at the same time, don’t buy into the right stocks afterwards.
RP: What can you do, then, to shift your focus away from the here and now? This simple tip is surprisingly effective.
JK: It sounds strange but my, I would say the best recommendation I can give is don’t look at your portfolio too often. Which is exactly what most people don’t do. Most people, if they’re worried about their investments start to look more often. The problem is, the more often you look you more you see these short term swings and the short term noise that actually doesn’t matter in the long run.
RP: Another way to avoid mistakes is to use a financial adviser — not to pick and choose investments for you, but primarily to manage your behaviour.
JK: A financial adviser is there to manage your emotions, to manage your behaviour. To help you when you get greedy, not to get too greedy. To help you when you’re afraid in a crisis like we’ve had so many in the last ten-twenty years. To not sell everything but to stick to your investments, even though it feels very very bad at the moment. So in essence, a great financial adviser is one who can play devil’s advocate for you.
So, returning to that tennis analogy, don’t try to play amazing cross-court winners. Focus instead on avoiding mistakes. And, perhaps most importantly, why not hire yourself a coach?
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