Many investors are unable to generate positive returns in a portfolio because of wrong decisions taken at the wrong time. Below are 5 most common mistakes investors make when they manage their portfolios:

Halo effect – A company with a good growth record and good previous share price performance might be seen as a good investment with higher expected returns than its risk characteristics merit. This view is a form of representativeness that can lead investors to extrapolate recent past performance into expected returns.

Overconfidence can also be involved in predicting growth rates, potentially leading growth stocks to be overvalued.

Home bias – When portfolios exhibit a strong bias in favour of domestic securities in the context of global portfolios. The effect has also been noted within geographical boundaries, factoring companies headquartered near the investor.

This bias may reflect a perceived relative informational advantage, a greater feeling of comfort with the access to company executives that proximity brings (either personal or local brokerage), or a psychological desire to invest in a local community.

Disposition effect – includes an emotional bias to loss aversion, will encourage investors to hold on to losers, causing an inefficient and gradual adjustment to deterioration in fundamental value. The disposition effect is emotional. Even investors who do not own a poorly performing stock, and are not thus emotionally affected by ownership, may be showing an irrational belief in short-term mean reversion in the form of a price recovery.

Herding – this occurs when a group of investors trade on the same side of the market in the same securities, or when investors ignore their own private information and act as other investors do. Herding reflects a low dispersion of opinion among investors about the interpretation of the information and it may involve following the same source of information. Herding may be a response to cognitive dissonance. It may give reassurance and comfort to investors to be aligned with the consensus opinion.

Regret – the feeling that an opportunity has been missed and is typically an expression of hindsight bias. Hindsight bias reflects the human tendency to see past events as having been predictable and regret can be particularly acute when the market is volatile and investors feel they could have predicted


This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. 

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