Avoiding These Three Major Mental Mistakes Might Just Save Your 401(K) Savings for a Rainy Day!

A piece of advice for anyone currently having a 401(k). In a situation where the market is approaching record highs, the largest hindrance that can affect your hard-earned retirement savings is not the market. Rather, it could be you!

Yes, you heard right.

Your mental miscues, biases, and emotional decisions can result in psychological distress, which in turn can make you have poor investment decisions.

Let’s have a good at one example. Suppose you have made a fortune investing in high-value stocks such as those of Netflix or Amazon. Yep, you made some great financial decisions. However, now it’s gotten to your head that you’re some sort of super-investor, the likes of Warren Buffet.

Being Deluded with Your Own Ability

Moreover, you might be obsessed with the idea that the longest bull market will last for eternity. On the other hand, you might believe that a drop will happen sooner rather than later.

Additionally, you might also make the mistake of only getting info from individuals that conform to personal beliefs regarding the direction in which the market is taking.

However, behavioral finance, which investigates the relationship between money-related moves and investor psychology that people make, have recorded the multiple personality traits that result in errors while making a decision.

According to the president of Market Semiotics at a research firm in Vermont, Mr. Woody Dorsey, he believes that there are major ways in which investors thinking can result to flawed decision making and subsequent blunders, and additional ways in which they can omit making these mistakes altogether.

Eliminating Overconfidence

After venturing a decade into bull markets, it can be quite tempting for investors to credit their success and desirable portfolios to some of the decisions that they made over the years. This is a big mistake because it makes them ignore the basic knowledge that the long climb in stock prices, for example, is what catapulted the  Standard & Poor’s 500 index by whopping 330 percent since 2009!

When one becomes overconfident, they believe that they are better informed and much smarter at investment decisions than their contemporaries.

According to Sunpointe Investments CEO, Michael Pompain, he comments on the situations, saying that such investors believe that because they made an investment that resulted in positive results, they are now automatically smart.

Additionally, he quips that investors that normally think highly about their own talents and abilities, are the ones most likely to take ‘foolish risks’ due to having delusions of grandeur. He or she is most likely to go ahead and purchase a ‘hot stock’ without doing sufficient background research.

They tend to dip their hands too deep in trading, and rarely keep in tune with their future financial plans. In short, don’t be that person!

Being overconfident can make you make pretty bad investment decisions

Not Looking for Other Options

One of the biggest mistakes an investor can make, and one that can make them run into tons of trouble is searching only for info that confirms with bearish or bullish views regarding the stock market.

According to finance professor at the University of California, Berkley, Mr. Terrance Odean, he notes that when most people have an investment idea, they usually look at the reasons why it is right, and avoid all the instances of it being wrong.

This can be quite a dangerous strategy for a number of reasons. For starters, investors who strongly believe that the bull has space to sprint, will often invest into the market with a lot of aggression, and this increases their chances of incurring heavy losses if they are wrong.

On the other extreme, individuals who believe too much in the apocalyptic crush of the market, may not be too keen to invest and increase their stock holdings. Hence, they risk missing out on great gains in the event the stock is rising.

As a rule of thumb, you should strive to be an optimist and pessimist at the same time!

It’s good to get opinions from multiple sources regarding the direction that the stock market is taking

Betting Big on a Continuous Trend

This habit is known as ‘recency bias’. It’s a belief that a particular trend will continue, regardless of shift in the paradigm or the environment.

This could translate to investors today making a massive mistake by betting on a stock whose price is steadily rising, and believing that it will continue to do so despite volatile market conditions.

That being said, an investor should be wary and on-guard that any market crashes could occur at any time.