Many people who invest their money make extremely illogical mistakes. UBS Foundation Professor Sandro Ambühl tells you which ones are typical. And how to avoid them.

This article by Conny Schmid was originally published in German in Beobachter on 5 March 2024. Translated and edited for layout purposes by the UBS Center.

When the dotcom bubble burst at the beginning of 2000, investors rubbed their eyes, believing they had invested in an industry with a promising future - until share prices plummeted. Some had probably suspected that they had bought overvalued shares. But they fell victim to two typical behaviors: They followed the herd for fear of missing out. Moreover, they believed that prices would continue to rise and that they would be among the first – and also among the smarter – buyers. Simultaneous herd instinct and overconfidence sound contradictory. But according to the "Greater Fool Theory", people believe that there is always someone who is stupider than they are. Specifically: "Knowingly or unknowingly, people buy overvalued shares and bet that someone else will pay even more for them," says Sandro Ambühl. He is a behavioral economist at the University of Zurich. One of his lectures also covers mistakes that private investors make. Overconfidence and the herd instinct are among them - as well as a whole series of other mistakes.

Leaving money in the savings account

The biggest mistake is not to invest your savings at all. Some people wait for the right time to invest - which doesn't exist anyway. Others shy away from the effort of gathering information. Studies show: Women in particular miss out on this opportunity. Yet investments pay off in the long term. At least that's what a look at the past suggests: over the last 90 years, savings accounts in Switzerland have yielded an average return of just 0.07%. Swiss equities, on the other hand, have achieved a return of almost 6 percent since 1929.

Trading too frequently

Anyone who buys and sells securities pays commissions on every trade. Anyone who constantly looks at the price and trades with every movement ends up losing money on average. "It has been proven that investors earn more if they remain inactive, regardless of the risk profile of their portfolio," says Ambühl. Overly frequent trading is linked to overconfidence and is more common among men than women.

Letting fear guide you

It is actually logical: securities should be bought when they are cheap and sold when they are expensive. But this is easier said than done. Some people tend to panic sell when the price falls: they sell their shares out of fear of losses. When the price rises again, they wait too long before getting back in. In the end, they have sold cheaply and repurchased expensively - and thus actually are losing money. This behavior was last observed at the beginning of the Covid crisis.

Acting too early and too late

Others change the composition of their portfolio when prices fall. They sell those shares that have made a profit compared to the purchase price too early and hold the losing shares for too long. Economists call this the disposition effect. Even if it is difficult, historically it makes more sense for small investors to simply wait and see, says Ambühl.

Overly expensive products

Many people invest their money in actively managed funds, even though fund managers almost never achieve higher returns than the average market return. The fees of actively managed funds are around ten times higher than those of passive funds. "Fees of 2 percent, for example, seem low at first glance. However, calculated over 10 or 20 years, it can reduce profits enormously," says Ambühl. The reason for this is the compound interest perspective derived from the rule of 72. It states that with an annual return of 7 percent, capital doubles approximately every 10 years. At half the interest rate, it takes twice as long. "For the sake of simplicity, let's assume that the fees are 3.5 percent and you invest CHF 10,000 over 20 years. Then the profit is reduced by a whopping 20,000 francs," calculates Ambühl. Instead of growing to around 40,000 francs, the capital only grows to 20,000 francs in 20 years. "Many people underestimate these costs."

Drawing the wrong conclusions

Anyone who sees a curve that points upwards overall over the last 15 years intuitively assumes that it will continue to do so. "People tend to find a structure in random patterns," says Ambühl. This can be disastrous if you neglect other indications of the possible future development of a share or blindly follow the herd instinct.

Too much domestic love

Investors prefer securities from domestic companies because they feel safer with them. However, if the domestic market is dominated by one sector - such as pharmaceuticals - there is a cluster risk. This becomes a problem if this sector suddenly goes downhill. "Research shows that you should spread your securities as widely as possible across sectors and markets," says Ambühl. In any case, it is an illusion to believe that you can react in time. "As a small investor, by the time you hear about problems or special events, it's already too late; the stock markets react much earlier."

Avoiding mistakes

Why are these behaviors so widespread? The answer is simple: humans are not rational beings. When things get complicated, we rely on our intuition. "It's very difficult to go against this," says Ambühl. Some characteristics are simply a part of our nature, such as the herd instinct. But some investor mistakes can also be attributed to clever marketing. "You often have to look for information on the fees for investment funds in the fine print," says Ambühl. In addition, fund managers usually receive commissions: The higher the fees, the more they earn. "They have no incentive to sell a cheap fund." There is a consensus among researchers that private individuals are best off investing in broadly diversified index funds that are not actively managed. These track the shares of the respective market, so you always achieve its current average return. They are also very inexpensive, and the risk can be spread globally. "It's best to invest in a fund like this once and look at how it performs as infrequently as possible. That way, you won't be tempted to constantly change something when the price goes up or down."