The High Cost of Bad Buy / Sell Decisions [Infographic]

Everyone has made a bad trade. No one has a perfect win streak. But what fuels these bad buy / sell decisions? Check out this week’s infographic for keen insight on what compels traders to buy high and sell low.

The first 5 trades I ever made were all sizeable increases. It didn’t fuel overconfidence, but did encourage me to continue to beat the market at a rapid rate—which can’t be done on a weekly basis without making some bad decisions along the way. The following bad buy / sell decisions infographic makes the claim that traders, on average, get beat by the S&P by a large margin over the course of 20 years.

Why do we trust our instincts about individual trades, rather than trusting that our economy as a whole will grow stronger over the long-run? Especially when we minimize risk by diversifying.

According to Barron’s, 85% of buy / sell decisions are wrong. We think we can outsmart the masses, but the mass market seems to be smarter than individuals 85% of the time!

The Emotional Biases That Compel Bad Buy / Sell Decisions:

  • Loss Aversion
  • Mental Accounting
  • Overconfidence
  • Anchoring
  • Sunk Cost Fallacy

Have you ever made a decision that wasn’t logical, but felt right? You might have felt fear in your heart, and thought that you were making the right decision. That’s where I think we believe we can “will” our way to a win. You may be able to do that in sports or in the office, but your will and confidence will do nothing to affect the market.

Here’s what I think is the most important take-away from The High Cost of Bad Buy / Sell Decisions Infographic:

“Roughly 90% of your portfolio’s volatility comes from your asset allocation, not day-to-day micro decisions about when to buy or sell. By maintaining a balanced portfolio, you can outperform average investors and, for that matter, the S&P 500.”

Readers: What emotional biases have you experienced that compelled bad buy / sell decisions?

Click on the image below for the full-size version, or head over to Jemstep to see it there.

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