If you ask most amateur traders why they invest, the answer shouldn't surprise you: to make money (obviously). However, lurking beneath the surface in our unconscious minds, there are two other motivations behind all of our decisions:
- Expressive benefits -- what does this say about me to others?
- Emotional benefits -- how does this make me feel?
Consider someone who buys a Prius -- their car might tell the people around them that they care about the environment. It might make them feel like they are contributing to the world around them. Ultimately though, it's just a car, like any other with a basic benefit: transportation.
How does this apply to your investments?
Amateur traders typically show lower rates of returns than pros -- often because they make simple, emotional based mistakes that a systemic advisor would surely avoid.
Trading too often: It's an easy trap to fall into. Checking the markets in the morning, riding the thrill of how much money you made yesterday, catching up to the minute financial reports on your smartphone. The thrill of how much money you made the day before, the desire to quickly earn back the losses you had last week, the confidence of feeling like you can read the markets.
But, the truth is clear: people who trade more often have lower rates of return in the long term than those who hold and ride the market.
Refusing to sell: Amateur traders often have investments they are in love with - that one business they were certain would succeed or are certain will still succeed. Clinging on to a failing investment with the hope that it will recover - because you have a gut feeling, because you're just "so invested", you spent a lot of time researching the investment ahead of time, or simply because you fear regret can increase your losses.
Being blind to the opportunity costs will lower your rate of return over time. A good advisor bases decisions on systemic, objective research and help you see losses for what they really are: sweet, sweet tax relief.
Buying what you know: It may seem easy to draw connections between the long lines at the Apple Store, or the never ending sea of Starbucks locations and assume that these are signs of growth and a sound investment. It's not uncommon for amateur investors to gravitate towards companies they are familiar with. Maybe you genuinely do love Apple products or Starbucks coffee. Unfortunately, that doesn't always mean they are a good place to put your money.
Studies have shown that familiar investments underperform and most amateur investors would be better off buying index funds. An advisor will have more knowledge about which companies in a diversity of industries are right for you - plus they will have done more research than what is available at the mall.
Smart investors are in touch with their feelings and keep them a safe distance from their finances.
Tea Nicola is the Co-Founder and Chief Executive Officer of WealthBar, Canada's only full-service online financial advisor offering diversified portfolios of low-cost ETFs, insurance and financial advice. Passionate about personal finance, Tea is looking to change the way Canadians save by making investing smarter, more transparent, and at more than half the cost of traditional advisors.