Whenever there is money involved, there are always traps you'll want to avoid. Knowing about these traps beforehand can make them much easier to recognize. The traps in this article are all psychological in nature, so they apply to everyone.
1The Sunk Cost Trap
The sunk cost trap is primarily caused by pride. With this trap, the investor is attempting to protect his previous decision. For investments, there is more at stake than just pride. However, sometimes it's necessary just to take the loss and move on.
If your investment turns out to be a real dud or is dropping quickly, the sooner you can get out, the better. Some stocks can take a decade to recover. Some never recover. Move on when the time comes.
2Poor Investment With Partner Investor
Another trap is confirming a poor investment with the person who provided the initial advice. If you're questioning the quality of an investment, the worst person to get reassurance from is the person who first suggested the stock. Don't fall into a co-dependent investing relationship.
There's no value in mutually confirming a bad decision to each other. Misery loves company, but you don't have to fall into this trap. Seek out an objective source of information to make a wise decision.
3Letting Friends Lead You Astray
Limit the amount of influence your friends and family have, over your investment decisions. Your brother doesn't necessarily know anything about the stock market or municipal bonds, simply because he's your brother. Only allow others to influence your decisions to the extent they have proven their expertise in this area. It can be challenging to handle friends and family when it comes to money. Be smart.
4Freezing When Threatened With Loss
You've probably heard that there are two basic responses a human can have when threatened: fight or flight. But, there is actually a third: freezing. Do you find it difficult to take action when things are going badly? When there is a challenge, it's best to make a thoughtful decision and act on it. Don't wait until it's too late.
5Not Being Flexible
Try to be flexible. Many people believe the first thing they hear without letting their opinion evolve. For example, consider the lowly egg. Most of us were brought up to believe that whole eggs are unhealthy. However, even though there's already research to support that eggs are extremely healthy, you're probably still hesitant to eat too many eggs.
So, the first thing you hear isn't necessarily the most accurate. Be open to all available information. If they were wrong about eggs, consider how many other things you believe that might also be inaccurate.
6Overestimating Investment Acumen
Many individuals want to believe they can out-think the experts. The truth is that many self-proclaimed "experts" are nothing more than people who have done a great job of marketing themselves. So, you might be able to do better than these people, but it's wiser to do your research and seek out true experts.
A good financial advisor is a true expert that spends all day looking at investments and frequently has access to information that the average investor does not. Many investors have piddled away a fortune because they were certain they knew better than everyone else. Maybe you're a financial genius, but can you afford to risk it if you're not?
Human psychology is a tricky thing. It's easy to fall into these traps and watch your investment portfolio take a serious hit. When the situation becomes heated, you're much more likely to fall victim to yourself. The solution is to be open-minded and honest with yourself regarding your investments and seek the advice of experts.