“Investor Mistakes Kill Returns – How They Can Do Better”

It’s not just market disruptions that hurt fund performance—investors themselves do as well, through their own actions. Ali Masarwah, a fund analyst and managing director of the consulting firm envestor, has identified a typology of classic investor mistakes—and offered some tips on how investors can combat them.

Investor errors destroy returns—not randomly or sporadically, but systematically and methodically—countless times a day. The poor performance of many individual investors thus no longer appears to be an “outlier,” but rather the result of recurring behavioral patterns. The study of investor errors has become an academic discipline. Behavioral finance research has thoroughly turned classical financial theory on its head—and shown that markets are not just about numbers, models, and rationality, but above all about people, their emotions, and their cognitive biases. Anyone who wants to understand why retail investors often make poor decisions despite having good information needs to think less in terms of formulas and more in terms of behavioral patterns.

Research on behavioral finance has shown for years that retail investors follow systematic patterns of thought and behavior—and thus repeatedly make the same mistakes. These mistakes are no coincidence, but rather an expression of cognitive biases and emotional reflexes that are often helpful in everyday life but systematically cost returns in the capital markets. Those who understand these patterns can make their investment strategy more robust and avoid costly mistakes. Here is our—by no means exhaustive—overview of classic investor mistakes and small hacks for mitigating them:

Emotion-driven poor decisions occur when fear and greed override strategy. Typical patterns include euphoric buying at market highs, triggered by headlines or social media, as well as panic selling during a market crash. These are driven by biases such as loss aversion, FOMO, herd mentality, and regret aversion. Clear rules (e.g., rebalancing ranges, fixed decision windows) and a written investment plan established during calm periods can help mitigate this.

Perception and interpretation errors arise when investors process information in a distorted manner. These include overconfidence, confirmation bias, recency bias, and illusory pattern perception: one feels overly confident, seeks only confirming information, overweights recent events, and recognizes spurious correlations. Countermeasures include conscious counterarguments (“devil’s advocate”), standardized decision-making checklists, and comparison with simple benchmarks.

Decision-making delay and procrastination lead to important decisions being put off indefinitely or, out of convenience, not made at all. Status quo bias and present bias ensure that the present always seems more important than the future. In practice, this manifests itself in statements like “I’ll take care of my investments later” or in failing to make sensible portfolio adjustments despite clear evidence. Automatic savings plans, default settings, and clear deadlines for reviewing one’s finances or portfolio can help here.

Concentration risk and home bias are another classic issue. Investors concentrate their assets in a few securities, sectors, or the domestic market and underestimate the risk. Familiarity bias (“What I know is safe”) and the endowment effect (“My stock is special”) reinforce these patterns. Simple diversification rules, clear upper limits for the weighting of individual securities and sectors/themes, as well as regular portfolio reviews, can help mitigate these issues.

Cost blindness leads investors to underestimate or ignore ongoing costs and fees. Small percentage differences in costs have a massive impact on net returns over the years. There is often a lack of transparency, comparability, and awareness of the compounding effect at the cost level. Here, our tendency to think linearly rather than exponentially plays a costly trick on us. Simple levers include the systematic comparison of TER, transaction costs, and product structures, as well as cost caps in the investment strategy.

Actions driven by impulsiveness and overactivity manifest in constant portfolio rebalancing, short-term trading, and “chasing” news. Investors confuse activity with control, even though the data clearly shows that excessive trading typically costs returns. Behind this lie overconfidence, the illusion of control (“If I trade, I stay in control”), and news-driven trading. What makes sense here are clearly defined decision-making intervals, filters for information sources, and a simple set of rules for when not to trade—for example, posts by the U.S. president on his Truth Social platform are best ignored.

Information overload causes investors to get lost in the details and lose sight of what really matters. Too much information—often irrelevant—creates noise without adding value to the decision-making process. A common pattern is collecting endless analyses, price targets, and opinions without using them to arrive at a consistent decision. Clear criteria for relevant information, limiting sources, and focusing on a few robust metrics are helpful.

Finally, planning deficits and present bias exacerbate many of the aforementioned errors. Those who fail to define clear goals, time horizons, and risk parameters tend to react situationally and emotionally when in doubt. Present bias, planning optimism, and status quo bias ensure that long-term planning is postponed to “later.” A well-thought-out investment plan with clear goals, set in writing and reviewed periodically, is the lever for mitigating one’s own behavioral patterns. I know several successful fund managers who have been keeping records of their investment decisions and the motives behind them for decades. They unanimously report that regularly reflecting on past decisions has significantly steepened their learning curve.

Investors don’t need to be familiar with every study on behavioral finance, but they should identify the key patterns underlying their past decisions and reflect on them critically. Those who are aware of their tendency toward emotionally driven actions, procrastination, or excessive media consumption can design their investment strategy to protect themselves from these tendencies. Rules, structures, and level-headed decisions—made during calm periods and adhered to during volatile times—can pay off in dollars and cents.