3 Habits of the Rich to Avoid

moneyWhen it comes to buying and selling in investments, at least one percent of investors will keep making the same mistakes that will greatly decrease their chances of achieving real wealth. Here are 3 habits of the rich to avoid at all costs.

1) Be Wary Of The Past

Fisher, President of Gerstein Fisher, a wealth management firm in New York has found a way to encourage clients to be more optimistic instead of burying their money under their backyard.

Take for example, in a bowl there are six white marbles and two black ones. The white marbles stand for a rising stock market, the black ones for a declining one. Historically the stock market goes up 75% of the time but it doesn’t go up three years in a row and down the next one. There is a likelihood of two declining years before selecting the white marble.

Fisher, who manages $2 billion for about 600 clients, says that most of his clients struggle with being fixated on events that have already happened. That’s the point of selecting marbles out of the bowl: The colour you select has no bearing on what colour you are going to get next. As stated by Fisher, “Most people cannot forget yesterday and if the past 10 years are influencing your decisions around investing, it is going to hurt you.”

2) Take Advice With A Large Grain Of Salt

Daylian Cain, an associate professor at the Yale School of Management has found from his research that many clients are too trusting, even when their adviser discloses to them that they have a conflict of interest in recommending certain investments.

In the case of an advisor disclosing a conflict, be it putting you into an investment run by his brother or one that pays him a higher commission, investors may buy less of what is being sold but they will still buy some of it, as they do not want their adviser to think they don’t trust him or consider him dishonest.

Simply put, investors do not understand the difference between what is being disclosed and what the risk is. A willingness to trust is good in other areas of life, such as marriage, but it may not be beneficial in investing.

3) Don’t Think You’re So Smart

While making an investment after a conflict is disclosed is an unwise move, other practices such as making a decision to buy after hearing about a company on TV while you’re having lunch does not sound prudent either.

Terrance Odean, a professor of finance at the Haas School of Business at the University of California at Berkeley, conducted a series of experiments showing people who are irrationally overconfident when it comes to investing.

According to Odean, “Buying is a daunting task and investors unintentionally, if not consciously, limit their attention. When a stock catches their attention, they make their decision on that and instead of choosing from 5,000 stocks, they consider a narrow range of 15.

On any given day at discount brokerages, the imbalance between buy and sell orders for stocks out of the news is 2.7%, meaning just about the same number of people are selling as buying. But the imbalance is 9.4% for stocks in the news. At large retail brokerages the difference is even more extreme, with a 16% imbalance for stocks in the news. Obviously, it’s better to conduct in-depth research than just following the herd!