7 Common Investment Mistakes to Avoid

KALAMAZOO, Mich. - March 15, 2016 - PRLog -- Investing, by its very nature, can be emotional - after all, it's your money, and your future. But to make the best possible investment decisions, you need to use your head - and not your heart.

And that means you need to avoid biases that can creep into your decision-making process. Here are some of the most common ones:

1. Loss aversion - No surprise here: Investors remember portfolio declines more vividly than gains. This selective memory may cause you problems. For example, to avoid future losses, you might just pull back from all risks, even reasonable ones.

2. Confirmation bias - You may believe certain things about market conditions and look for information to support those beliefs. But watch out - you might be ignoring other information that could be valuable in making choices.

3. Anchoring - If you fall victim to "anchoring," you could become fixated on past information and then use that information to make inappropriate investment decisions. To illustrate: You might think you could sell a particular investment at a given price even if new information is available or the investment landscape has shifted significantly. As a result, you become stuck and may even "ride markets to the bottom" if you can't let go of what you think the price "should" be.

4. Mental accounting - You perform "mental accounting" when you divide your money into "pools" and assign purposes for those pools. This can be beneficial - for example, if you earmark some money for retirement, you may be less likely to tap into it for other reasons. However, mental accounting can also work against you. If you receive a tax refund and you haven't assigned to a specific pool, you might just spend it quickly rather than use it for a good purpose, such as bolstering your retirement funds.

5. Recency bias - Will recent events always repeat themselves? If you think so, you might pour money into an asset class that's already peaking and sell out of investments when their price has fallen. In other words, you'd be doing the exact opposite of "buying low and selling high."

6. Hindsight bias - You may be tempted to make investment decisions based on your own predictions - and when those predictions are accurate, you might become convinced you can continue forecasting successfully. But it's extremely hard for anyone - even the so-called "experts" - to consistently predict market movements correctly, given the many variables in the investment world. Ultimately, you're better off making investment choices based on solid principles, such as diversification, rather than counting on your ability as prognosticator.

7. Herd mentality - People like to "belong." This desire could motivate you to pursue a particular investment, or class of investments, because you've heard it is "hot" or that "all the smart investors are doing it." Once again, though, no one has a crystal ball. And even more importantly, a hot investment may still be inappropriate for your individual needs.

These aren't the only investment biases or tendencies, but they should give you a pretty good idea of the feelings and behaviors that could lead you to making poor investment choices. An Edward Jones financial advisor can help you to make those investment moves appropriate for your situation.