Making your own investment decisions can be a tricky business. Emotion, bias and the ongoing roller coaster with returns (or losses!) means that DIY investing is not for the faint hearted. But if you are wanting to give it a crack on your own, here's a few of the most common mistakes DIY investors make, and what you should do to avoid getting caught in the same blunders:
Herding bias – Don't be a clickbait investor
It's tempting to simply copy people who seem to know more than yourself, but this can be a tricky path to take when investing. While it might seem attractive when a celebrity is investing in a certain company, it's always worth taking this information with a grain of salt. If you don't know someone's rationale for trading, you can't assume you know their real view on an investment.
The same is true if you hear about a hot opportunity at a BBQ - it's always best to do your own research instead of blindly following other people's advice. Of course, you can use the presence of professional investors or public excitement as part of your decision-making process, but be aware of possible hidden motives or herd mentality and don't let others dictate your decisions. It's safe to say if someone like Floyd Mayweather is trying to sell you on a cryptocurrency, his endorsement alone would not justify the quality of the deal.
Confirmation bias - Take a good look under the hood
Our brain has a tendency to focus on information that confirms our current views and discard that which challenges or contradicts. Most recently this has been brought to light during the Facebook privacy scandal, where Facebook filtered what users saw based on their existing viewpoints. This bias can also occur when investing. If you find a company you would really like to invest in for whatever reason - perhaps they produce a high-quality beverage you enjoy - you are likely to then give more weight to any information that confirms your current view (such as positive articles or endorsements) and ignore any information which challenges your view (like an inflated price for the shares). It's also possible that if you initially see a lot of positive support, that might lead you to overlook any negative material that you discover as you dig deeper.
A good way to avoid this type of thinking is to plan in advance what relevant information you need in order to make a good decision, and then make sure you are ticking all those boxes without letting information from one area influence another. Just because a stock has gone up over the past week, that doesn't mean you should automatically view the management as suddenly being more skilled in the long-term running of the business. Don't let short-term noise or your initial views distract you from making objective long-term investment decisions.
