1. Overconfidence
Investors in particular who have already made a large profit on the stock market feel vindicated and tend to overestimate themselves. They believe they can predict market and industry developments and invest with blind trust in their own judgment. But excessive confidence often ends in high losses, especially after a streak of luck. A bad investment with a large investment amount is often enough to completely wipe out many smaller profits.
Therefore, investors should never invest their assets in a single investment. Savings plans or the division of larger amounts into several partial amounts that are invested over a longer period of time can protect against overestimation.
2. Incorrect investment allocation (asset allocation)
Another mistake is that many investors put together their portfolios solely based on performance. A one-sided performance orientation inevitably leads to high risk, because the return of an investment is always a reflection of the underlying risk.
Investors should be aware of the exact goals of their investment. A basic distinction is made between:
- Securitythat means the system should be as safe as possible. The probability of a loss of the invested capital should be minimized or even eliminated.
- Returnwhich means that the system should produce the highest possible yield.
- liquiditywhich means that the system should be able to be sold again as quickly as possible if necessary.
Experience has shown that these goals can never be completely achieved in combination. Investors must therefore weigh up which goals are more important to them than others. When putting together their portfolio, investors should ensure that the risk in the portfolio also corresponds to their actual risk appetite. The relationship between the individual systems to one another must also be taken into account. In order to set up a portfolio in a balanced manner, the asset allocation (asset allocation) into different asset classes such as stocks, bonds, funds, ETFs and certificates, but also the diversification in sectors, regions, currencies, raw materials and precious metals plays a significant role.
3. Hustle
It is usually the hectic times that tempt investors to make mistakes. For example, anyone who rushes to redeploy their portfolio every time the slightest message arrives will usually pay so many fees and transaction costs that any profit they have achieved can quickly be wiped out. The old stock market adage “back and forth makes pockets empty” still applies today.
Investors should therefore carefully inform themselves about what market opportunities look like and not rush from one investment to the next hectically and without thinking.
4. Herd instinct
One of the most common mistakes is the so-called procyclical behavior of investors. This means that investors buy on the stock market when everyone is buying and vice versa (herd instinct). The reason for this lies in trust, because only when the stock market has been doing well for a certain period of time have investors built up enough trust to invest themselves. From the Amsterdam tulip craze in the 17th century to the US real estate crisis – the cause of these market exaggerations was largely due to herd instinct.
To counteract this, investors should try to invest in a “counter-cyclical” manner. Discipline plays a crucial role here, because when optimism and euphoria break out, investors have to learn to divest themselves of their investments in a timely manner. The likelihood of investing at the actual peaks and troughs is considered more of a hit and miss – even among professional investors.
5. Fear of mistakes
If investors make a loss on the stock market, common sense often fails, because the majority of investors tend not to realize losses as quickly as they realize profits. Investors usually do not want to admit that they have made a mistake, and as long as a loss is not realized, they do not have to admit that they have made a wrong decision. Many investors also focus too much on the purchase price. Most people only sell their investment when the purchase price has been reached. It is therefore important to get rid of an investment in a timely manner, even if there are losses. Because the profit necessary to compensate for the loss increases disproportionately as the price falls. Investors who have suffered a loss of 50 percent need 100 percent profit to make up for the loss.
If you want to protect yourself from your own irrationality when dealing with losses, you can, for example, work with loss markers such as stop-loss prices. This means that the investment is automatically sold when the value of the investment has fallen to a predetermined level.
Step by step to success
The first step to being successful on the stock market is to pay attention to the five mistakes described and to recognize where there may be weaknesses in your own behavior. Only investors who can assess themselves and their behavior are able to consciously deal with the dangers on the stock market. But in addition to the psychological challenges of adhering to certain rules when investing, the technical aspects must not be ignored either. Especially with structured financial products (derivatives) such as warrants, certificates and reverse convertible bonds, investors should understand how their investment works and what opportunities and risks arise from the respective investment.
The special feature of derivatives is that their performance is derived from the performance of an underlying asset (e.g. a share or an index) (from the Latin “derivare” = to derive).
The variety of products and the mass of structured products in Germany are both a blessing and a curse for private investors: On the one hand, there are products with a wide variety of conditions and terms for every market expectation, which enable investors to specifically implement their expectations and optimize their securities portfolio. On the other hand, the variety of products creates an almost unmanageable amount of financial products that you first have to get an overview of.
Checklist for investors
Once you have an overview, warrants, certificates and reverse convertible bonds, for example, can be a useful addition to a securities portfolio. In order to simplify the selection and decision to purchase a derivative for investors, the German Derivatives Association (DDV) has developed a checklist for derivatives investors together with the German Protection Association for Securities Ownership (DSW). It includes a total of 18 questions. Investors can use these questions to clarify the most important points before purchasing a warrant, certificate or reverse convertible bond. The checklist provides a good overview of the information that investors should obtain before deciding to purchase a product.