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The Five Deadly Sins

Turbulence in the market can often be linked not to any perceivable event but rather to investor psychology. A fair amount of your portfolio losses can be traced back to your choices and the reasons for making them rather than unseen forces of evil that we tend to blame when things go wrong. Tonight we look at some of the ways investors unwittingly inflict problems on the market and on their portfolios. 

Following the Crowd
Humans are prone to a herd mentality conforming to the activities and direction of others. This is a common mistake in investing. Imagine you and 200 other people are caught in a burning building.  If someone took charge and said follow me I know a safe way out most would be following this self proclaimed leader. Even though this person may not be qualified to lead anyone out of a wet paper bag let alone an unfamiliar building safely many would follow anyway and ask questions later.  Sadly we are more likely to end up as ash than find our way out. This tendency to panic and depend on the direction of others is exactly why problems arise in the stock market. 

Here are the five deadly sins of investing or trading that you should keep in mind when you are tempted to blindly follow the herd:

Pride This occurs when you are trying to save face by holding a bad investment instead of realizing your losses. Admit when you are wrong cut your losses and sell your losers. At the same time admit when you are right and keep the winners rather than trying to lock in every small profit (Of course this is subject to market conditions). 

Lust Lust in investing makes you chase a company for its stock price instead of waiting and trying to find a better less risky entry price.  This lust to just get in at any price is a definite nono and is the cause of stock bubbles and crazes. 

Wrath This is something that always happens after a loss. You blame the companies you invested in analysts CNBC Cramer STHQ the paperboy and everyone else but yourself.  Instead of placing blame accept the responsibility and face the music.  Instead of losing your cool learn from the mistake and realize what you have to do next time to get it right. 

Gluttony A complete lack of selfcontrol or balance gluttony causes you to put all your eggs in one basket possibly an overhyped basket that does not deserve your eggs in the first place. Remember balance and position size are essential to a portfolio. Too much of anything cannot be good for you. 

Sloth You guessed it this means being lazy and not doing your due diligence. On the flip side a little sloth can be okay as long as it is in the context of portfolio activity. Passive investors can sometimes profit with less effort and risk than overactive traders but only if they are in the right sectors at the right time.





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