Aberdeen Asset Management is on a quest to help investors resist “the siren call of short-term opportunity.”
Short-term investing, the group says, often is unproductive and stems from “bad habits” linked to “behavioral traps and temptations,” the group said in its report “The Seven Deadly Sins of Multi-Asset Investing.”
The group doesn’t aim to make Catholic and other investors feel guilty about their less-than-stellar investing habits, just more self-aware and able to “resist them.”
“We hope our take on sin is a fun but useful insight into the way we think about the world and multi-asset investing,” said Mike Turner, head of multi-asset for Aberdeen Asset Management, in the piece.
Read on to learn about the common investor tendencies that Aberdeen suggests be avoided for reliable, long-term performance.
1. Lust (Chasing Hot Stocks)
“Investing for the long term sounds like an obvious strategy, but it is surprising how few investors actually adopt it. In our fast-paced world, the desire for instant gratification can overwhelm,” the group explained.
The prospect of immediate gain or desire to jump into the latest hot stocks or sectors can prove harmful, since these strategies frequently are followed “long after the opportunity to profit has passed,” Aberdeen says.
“A less lusty approach that weathers market ups and downs over years, not just weeks, almost always proves more fruitful — as well as cheaper — in the long term,” Turner said.
2. Gluttony (Information Overload)
Don’t get lost or overwhelmed by information and analysis being thrown at investors online, on TV and radio, and in print.
“Simpler but disciplined analytical frameworks can be the most robust,” Turner said.
When evaluating asset classes, it’s best to look at yields and growth prospects.
“If valuations are high (and therefore yields are low), the chances are that valuations will fall (and therefore yields will rise),” he said. “Conversely, if yields are high, there’s a good chance that they will fall and valuations rise.”
Muster the discipline to screen out “market noise,” which few did during the dot-com bubble, when many investors chose to count eyeballs, instead of looking closely at company cash flow.
“When it comes to information, less is very often more,” Aberdeen stressed.
3. Greed (Following the Herd)
“Whether it’s equities, bonds or property, the avarice of the herd is always to be treated with caution,” the group explained.
When investors are piling in to a stock or sector, it’s good to steer clear or even sell. At the same time, when there is market agitation or investor rejection, this may “provide rich territory for smart, selective investors who know what they want to buy and why.”
Equal discipline also is required when it comes to keeping portfolios balanced.
“If everyone is moving to equities, it can be tempting to sacrifice your fixed-income exposure. But with that, you could also jettison your risk diversification,” the investment group said.
4. Sloth (Neglecting Due Diligence)