If you were challenged to write down the biggest threats to your investment success – be it through your 401(k), retirement fund, or other investments – it’s likely that your list would include:

  • A severe market downturn
  • Adverse economic circumstances
  • Political activity affecting business productivity.

In all respects, you’d be right, as those events would certainly have a short-term effect on the value of your portfolio.

However, all of those can be planned for and mitigated to varying degrees. Indeed, a key part of your investment strategy will revolve around the steps you take to prevent events like that from causing any long-term damage to your wealth.

Furthermore, all those events and others – think the financial crash and pandemic – have occurred within the last 20 years, yet markets have continued to deliver healthy long-term returns.

While those threats are certainly not to be taken lightly, often the biggest risks come not from the market or the economy, but from your own behaviour.

Read about five of those behavioural risks and how to avoid them.

1.Poor decision-making and acting for the sake of it

There’s a well-known investment adage that suggests that if you don’t know what to do, the best thing is to do nothing.

It’s also worth remembering that the expression “do nothing” actually includes an active word (“do”), so the decision is the outcome of a thought process rather than simply the lack of a reaction.

The key point underlying all the poor behaviours you will read about here is the importance of having a robust plan in place.

Without one, you will be rudderless and are likely to make instant judgments rather than considered decisions that align with your plan.

Conversely, with a plan to fall back on, you will have a buffer that can prevent you from doing things because you feel you ought to.

2. Believing that you can time the market

One of the most common investment mistakes is trying to time the market rather than leaving your investments alone.

Developing a strategy that involves continually buying and selling requires a lot of expertise and, because of the amount of research required, plenty of time on your hands.

Furthermore, it’s still not a guarantee of success. After all, Morningstar reported that only 14.2% of investment managers beat their benchmarks in the decade up to 2025. If they can’t do it with all the resources at their disposal, what hope is there for the amateur trader?

It means that you need to be correct twice – once when you buy and then again when you sell. You may manage to do this on occasion, but as a long-term strategy, it can be high-risk and could often leave you losing more than you win.

You can avoid this “double jeopardy” by trusting your plan and staying invested rather than continually meddling with your portfolio.

3. Failing to diversify

One of the key pieces of investment advice we give all our clients is the importance of diversifying their investments across markets, sectors, and regions.

If you think about the threats we referenced at the start of this article, all of them can be mitigated to a certain extent by spreading your investments across multiple sectors rather than focusing on just one or two.

Different sectors and regions are affected differently by macroeconomic influences. While worldwide crashes are not unheard of, they are very rare.

By spreading your investment exposure, you can offset losses in one sector with gains in others, and improve your chances of enjoying steady, long-term growth.

4. Succumbing to the fear of missing out

It’s human nature to believe you should be doing something because everyone else is.

It’s often called the fear of missing out, usually shortened to “Fomo”, while in a more formal list of behaviours, it’s referred to as “herding bias”.

Fomo can often explain sudden market rallies or the rise in the value of a certain stock or commodity.

Herding bias then helps to explain the sudden decline as everyone panics and starts selling.

Rather than following the herd, you will enjoy more long-term investment success through sticking to your strategy and resisting the urge to do something simply because everyone else is.

5. Letting your emotions drive your investment decision-making

If you’re thinking of activities where keeping a level head and staying calm are prerequisites, investing money would probably be one of the first that comes to mind.

After all, your investment portfolio is the engine that will drive much of your financial activity and future security. So, it makes sense to ensure you make decisions based on rational thought and careful consideration.

However, far too often, it is easy to forget that fundamental principle and end up making decisions based on fear and Fomo.

Fear when you sell stocks during a downturn, and Fomo when you buy at market peaks.

Often, these emotions are driven by incessant media speculation and other noise, so one big step towards avoiding emotional investment decisions is to not believe the hype or catastrophise.

Having a plan and sticking to it can help you avoid poor behaviours

There are some simple steps you can take to avoid being your own worst enemy when it comes to investing your money.

As you have read, the most important thing is to ensure you have a robust investment plan in place that you do not deviate from.

Because of the importance of your plan, it’s worth spending time to ensure it accurately reflects your long-term objectives, along with other key criteria such as your attitude to investment risk and the amount of capital you are prepared to risk to meet your goals.

We would also recommend that you get expert advice when putting your plan together and when reviewing it.

Get in touch

As you have probably appreciated from reading this article, expert advice is important when you are looking to grow your wealth and ensure your financial security through investing.

If you are a British expat living in the US and would like to talk about your own arrangements, please get in touch to arrange an exploratory Zoom call to talk through your options.

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