Not all investment mistakes are created equal.

Some are annoying. Some are self-inflicted. Some are painful. And some you can’t come back from. But we all make investment mistakes, and it’s useful to understand how much worry they should cause us.

Ben Carlson of Ritholz Investment Management in New York has come up with a hierarchy of investment mistakes, which applies anywhere in the world, and is a great way of deciding how much we should be regretting them.

Annoying mistakes

These are the investment mistakes that can cause regret but don’t necessarily destroy your financial plan. They can include:

• Selling a winning position too early.
• Holding onto a loser for too long.
• Not rebalancing your portfolio.
• Investing in an underperforming fund.

It can be annoying if your holding underperforms but it’s not usually the end of the world.

Self-inflicted mistakes

Most investment mistakes are self-inflicted, but some errors are more glaring than others — paying high fees, over-trading, not doing your due diligence on an investment, confusing your time horizon with someone else’s, etc.

Investing is hard. Carlson suggests that just knowing this and having an adviser to help you is often the best way of avoiding these mistakes.

Painful mistakes

These mistakes will cost you, cause serious regret and leave lasting scars. Although you can survive painful mistakes, they can also cause lasting damage.

Carlson suggests that incorrect timing of the markets is probably the most common painful mistake – selling an investment which has lost value but then recovers or missing out on a rising market, for example.

Endgame mistakes

Annoying, self-inflicted and painful mistakes are no fun, but you can come back from them. It might take some time and patience but it’s possible.

However, there are also endgame mistakes that are more or less impossible to come back from — fraud, scams, Ponzi schemes, etc.

If an investment sounds too good, it most probably is. There are no guarantees or perfect solutions when it comes to investing. Investing has been around a long time, so it’s pretty unlikely that someone will discover that magic bullet – people have been looking for it for years.

Financial scams are ever present, but Carlson suggests that we should take particular care after a bear market when people are hurt or during a bull market when investors throw caution to the wind. We have certainly been in a bull market for shares (and in particular for the largest seven shares in the world, which have been driving index returns) and Bitcoin has been in a spectacular bull market. Investors who feel they are missing out are likely to be more vulnerable to scams in these conditions. Carlson suggests it’s time to be more careful.

What Should We Do About It?

Carlson’s hierarchy helps us all to work out which types of mistakes we should be avoiding; if things do go wrong, it’s much better to have made an annoying mistake rather than an endgame mistake.

When presented with an investment opportunity, it’s good practice to think about what can go wrong, and to work out whether that might be annoying, painful or disastrous.

Of course, we think that the best way to avoid mistakes is to work with a good qualified adviser. One part of our role is as helping you avoid making investment mistakes and helping you to make good decisions. But Carlson’s hierarchy of mistakes can also benefit those who haven’t chosen to take advice (or don’t have the right advice)!

You can read the original article at https://awealthofcommonsense.com/2024/12/the-4-types-of-investment-mistakes/

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.