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Avoiding Mistakes (Part 1)

Mistake #1: Trying to Control Things You Can’t

Ben Johnson 28/12/17

“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”
—Warren Buffett 

Investors spend a massive amount of time trying to make all the right moves. The collective effort dedicated to picking good stocks, managers, exchange-traded funds, and so on, is immense. There are countless books, magazines, newsletters (including this one), podcasts, blogs, television programs, and more dedicated to helping investors make the best possible decisions when it comes to selecting and managing investments. Far less energy and commentary is committed to the topic of how not to make the wrong moves. Here, I’ll discuss three common mistakes, all of which I’ve made myself. All three are related in that they are all behavioral issues that have been hard-wired into us over centuries. I’ll also share the potential consequences of these behavioral blunders and how you might be able to avoid them.

Mistake #1: Trying to Control Things You Can’t
Countless factors drive global markets. Randomness rules, so predicting how these myriad variables will influence securities’ prices is impossible. Thinking otherwise is foolish. Deep down, we all know this, but we prognosticate nonetheless. What’s more, we have a tendency to think that we not only know how the future will take shape, but that we have some part in shaping it.

Investors cannot control the path of interest rates, increases in productivity, the level of Amazon.com’s (AMZN, listed in the U.S.) stock price, and so on, but we often act as though we can. The illusion of control is pervasive. It is in some ways a form of self-preservation, and it’s been linked to positive mental health.1 But as investors, it can be hazardous to our wealth.

The illusion of control can lead to overconfidence. Overconfidence can lead to overtrading. Overtrading will almost inevitably leave you short of meeting your goals.

While I could go on forever enumerating the things that we cannot influence, the list of those things we can control as investors is much shorter. The most meaningful levers we can pull to affect our investment outcomes are as follows.

1 | Save. Sock away as much as you can. This is the investor’s equivalent of advising you to eat dark green leafy vegetables. We know it’s good for us, but we’d like it better on a pizza. The earlier we begin saving, the better, as it buys us more time for the magic of compounding to work in our favor.

2 | Invest. This may seem obvious, but the biggest determinant of your investment success isn’t which stocks or funds you pick, or how you allocate your assets, but simply whether you’re in the market at all.2

3 | Allocate your assets appropriately. Asset allocation matters, though it’s a distant second to simply being invested in the market. How you allocate your assets depends on your goals, your time horizon, and your willingness and ability to assume risk, among other things. Having an appropriate mix of stocks, bonds, and cash will do more to move the needle than trying to pick the best securities or managers you can find.

4 | Minimize costs. Fees, commissions, taxes—every penny spent covering these costs is a penny that will not compound over time to be savored down the road. So spend every penny wisely.

5 | Avoid taxes (particularly applicable for U.S. investors). Please note that I did not write “evade taxes.” While we can’t control tax policy, we can respond to it. Locating less tax-efficient assets (closed-end funds, for example) in tax-deferred accounts and investing in relatively tax-efficient vehicles (such as equity ETFs) in taxable accounts can help you avoid putting any more pennies into Uncle Sam’s pocket than you have to.

There are countless things investors cannot control, but we often kid ourselves into thinking we can. Avoid overconfidence by keeping this short list nearby. Give it a look then next time you think you know what the launch of the iPhone X will do for Apple’s (AAPL, listed in the U.S.) stock price.


In part 2 of this article, I will talk about the other two common mistakes in investing.

1 Presson, P., & Benassi, V. 1996. “Illusion of control: A meta-analytic review.” Journal of Social Behavior & Personality, Vol. 11, No. 3.

2 Xiong, J., Ibbotson, R., Idzorek, T., & Chen, P. 2010. “The Equal Importance of Asset Allocation and Active Management.” Financial Analysts Journal, Vol. 66, No. 2, P. 22. https://doi.org/10.2469/faj.


About Author Ben Johnson

Ben Johnson  

Ben Johnson is the Director of Passive Fund Research with Morningstar.