Although most of the financial assets of Spanish households are found in current accounts and deposits, the need to make savings profitable as a recipe against inflation has driven investment in other assets, such as fixed-income securities and funds. Financial products that can provide attractive returns, but that also entail greater risk than the traditional term deposit, which in general is still poorly remunerated despite the rise in rates.
For this reason, it is essential to have a savings cushion for unforeseen events - at least three months' salary - before starting to invest, and from there to set the amount of money that will be allocated for this purpose, which will depend on the financial situation. staff. For inexperienced investors, it is advisable to always have financial advice to guide them in building a balanced and diversified portfolio. But even then, mistakes are often made.
“It is very difficult to always beat the market,” says Greg Wendt, equity manager at Capital Group. Proof of this, he points out, is that “even the most successful managers are right 55% of the time and wrong the remaining 45%.” However, there is a positive reading: errors can be the basis of future successes, although knowing how to identify them will be essential to optimize the result. Therefore, the most common mistakes are detailed below.
“Never lose money.” This is one of the investment rules of Warren Buffett, CEO of Berkshire Hathaway. However, no one can be right all the time, not even the Oracle of Omaha. That is why one of the keys to its success lies in the diversification of its investments, as can be seen in its portfolio, made up of more than 40 listed companies from various sectors, among which Apple, Bank of America, American Express, Coca Cola and oil companies like Chevron and Occidental Petroleum.
In order to achieve good diversification of assets, Mary Buffett and Sean Seah recommend in The 7 Secrets to Investing Like Warren Buffett that a portfolio should contain between 15 and 20 different stocks, while establishing the following rule: do not allocate more than 10% to a single company, although they specify that the investor should only invest that percentage in those companies in which they “completely” trust. Diversification is, therefore, essential in any investment strategy, since although it is not a guarantee against losses, it can limit them.
In addition to diversification, another aspect that must be assessed is when you want to collect the returns from the operation. In this sense, Sébastien Senegas, head of southern Europe at Edmond de Rothschild, maintains that a common mistake made by inexperienced retail investors is the failure to specify a time horizon. "If you know that this money has to pay off in 5 years, you are not going to look every day at how [your investment] is going, since your acceptance of risk and losses is much higher," he argues.
To set a time horizon, the investor must consider when he will need to recover the money invested and the return generated - if any -, although he must take into account that too much rigidity in meeting this deadline can harm him. "For me it is crucial to play with the weather forecast. "It is very difficult to get it right," continues Senegas, and the rush to collect profits "leads us to always buy or sell wrong." For the expert, a good way to reduce the risk is adopting a strategy with periodic contributions in the long term.
Excessive optimism and confidence can lead investors to overlook factors that are beyond their control by overestimating their ability to make rational decisions. The direct consequence is taking unnecessary risks or rotating investments too frequently. To tackle this error, "you have to be pragmatic and not take into account previous results to make future decisions," declares Pilar Vila, head of marketing and communication at Schroders.
While buying low and selling when the price is high is the goal of every investor, guessing the best time to enter and exit the market "is very difficult and can be expensive," he warns. According to the analysis available to the firm, "disinvesting completely justifying the fact that the shares have reached very high valuations has been a losing strategy for some in the past."
Suppose, for example, that an investor in the US market feels uncomfortable every time the valuation of the S
In short, says Vila, a classic mistake is trying to predict what is the best time to enter and exit the market, and the solution is "to have a plan for the time" in which the investment will be maintained and that this "coincides with the Objectives to be achieved.
Another way of investing that can end up being ruinous is to bet on those companies with projects that the investor finds attractive, since "we should not assume that a company can execute its business strategy without understanding how it is going to do it," he explains. Wendt. A statement that the Capital Group manager bases on his own professional experience, when a few years ago he decided to invest in a cruise operator that intended to operate exclusively in the Hawaiian Islands. "I carefully analyzed the dynamics of the tourism sector in Hawaii and the cruise industry in general, and concluded that these voyages would be in strong demand," he explains. The company managed to raise all the necessary capital, hired a management team and began building the ship in a shipyard in the United States, where a cruise ship had not been built for more than 25 years. What could go wrong? "It turns out that recovering industrial skills after having lost them is not so easy. The multi-million dollar effort required to build the ship failed, and the company went bankrupt for this and other reasons."
One of the most pernicious cognitive biases for the investor is that of the herd effect, the tendency to copy the behavior of the group. A trend that is not foreign to investment. A recent example of this behavior, comments Vila, are the enormous investment flows towards the big US technology companies - Facebook, Apple, Amazon, Microsoft and Google (Alphabet) - known as the "FAAMG", which have overheated the market. US stock market since the pandemic. "This has led to the five largest stocks in the S
Another somewhat more distant example of the herd effect is what happened in the years before the 2008 financial crisis when Spaniards went into debt to simply do what others did: buy apartments.
To avoid this cognitive bias, says Vila, you have to be realistic about your financial situation, evaluate it with a cool head and decide your financial objectives, the amount of risk you are willing to assume and for what period. In this sense, collecting data and analyzing it is essential, as is experience, which will avoid falling into paralysis by analysis. "Analytical work is crucial, but sometimes more information is too much. To invest successfully, you have to know when to act with the information you have," explains Lisa Thompson, equity manager at Capital Group.
Javier García Díaz, head of sales for Iberia at BlackRock, advises always orienting the portfolio in the long term, which means that investors "do not get carried away by the immediacy of information and know how to endure declines so as not to miss out on the gains of the recovery." later". He also insists on the importance of diversification "both in asset classes and investment tools."
The reason, Vila recalls, "is that the sharp rises and falls of the market in the short term tend to influence the most anxious investors." In this sense, it is worth remembering the study carried out at the end of the 20th century by psychologists Daniel Kahneman and Amos Tversky, which determined that human beings give more importance to not losing an amount than to the possibility of gaining it.
Despite this, there are strategies to counteract the nervousness caused by loss aversion, such as having an investment plan and not losing sight of it. "It also helps to limit the frequency with which short-term information is accessed, as this stimulates the long-term perspective of investments and limits making impulsive and unnecessary decisions," adds Vila.
How then to react to the great shocks that sometimes occur in the financial markets? "In general, when we see movements as discriminated as those we are seeing, the tide does not distinguish between companies and once it rises again it reveals very interesting opportunities from a fundamental point of view that only a good active manager can take advantage of," Vila responds.
Finally, knowing when to sell a position and move on can be just as important as knowing when to buy it. While it may seem simple to systematically identify solid companies that can generate long-term returns, "it is incredibly complicated," says Martin Jacobs, equity manager at Capital Group. The main reason is that large companies can also fail.
That is why he is convinced that the key to success lies in the importance of conviction and weighting, as revealed in a book by fund manager Lee Freeman-Shor, who analyzed the investments of 45 of the main investors for seven years. of the world. "What he discovered was that it's not about how often you're right or wrong, but how much money you make when you're right and how much money you lose when you're wrong," he says.
Be that as it may, the investor has to be prepared to abandon an investment when it no longer offers good results, so even those who invest for the long term "must be willing to change course when an investment thesis stops working," he concludes. .
