The hardest part of investing can be learning when to get out of your own way.
As human beings, we are emotional, impressionable, and often a lot less savvy when it comes to investing than we think.
After the fallout of the Great Recession, the SEC commissioned the Library of Congress to research “Behavioural Patterns and Pitfalls of U.S. Investors,” a study that shines a harsh light on the shortcomings of individual investors.
It discovered that one of the “particularly dangerous” mistakes employees often make is blindly buying into their employers’ stock.
Finance brains call it “familiarity bias,” the force that drives people to favour businesses they have some personal connection to when picking stocks. From the study:
“Not only does concentration in one asset violate the principle of portfolio diversification, but, if employees devote a large portion of their portfolios to their own company’s shares, they run the risk of compounding their suffering if the company does poorly: first, in loss of compensation and job security, and second, in loss of retirement savings.”
Need proof? Just ask anyone who used to work at Enron.