When looking for the best UK shares to buy, investors like me often find the biggest challenge is their own emotions. Fear, greed, hope, frustration and boredom can wreak havoc, according to a new study by online trading platform IG.
Here are five mistakes that can scupper even the very best UK shares and how I get round them.
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Being ruled by fear
Nobody likes losing money, but investors can take the principle too far, says IG analyst Chris Beauchamp. “Fear can cloud decision making, causing a trader to close out a position too early, or miss out on a profit by being too afraid to open a trade.”
To reduce the fear factor, I do my research carefully to be confident of buying the best UK shares I can. I want know why I’m buying, how long I plan to hold, what kind of return I expect, and how each stock fits into my portfolio.
Getting too greedy
Investors who demand excessive gains often act irrationally, Beauchamp says. “It manifests itself when a trader gets over enthusiastic and trades beyond their means. Or opens more positions than usual or holds on to them for too long to chase an even greater gain.”
In my early years as an investor, I sold stocks when they didn’t deliver after just two or three months. Everybody wants to make money, but getting greedy isn’t good.
Expecting the best UK shares to be even better
It’s good to be optimistic when buying stocks, but don’t overdo it. Even the best UK shares may take time to show their true worth. Beauchamp says excessive optimism manifests itself in strange ways. “For example, someone might hold on to a losing trade because they believe that it will reverse its trend and become profitable.”
If buying a FTSE 100 blue-chip, I wouldn’t expect its share price to double in six months, then complain when it doesn’t. I set more realistic expectations.
Getting frustrated when UK shares do unexpected things
Beauchamp says too many traders get annoyed when markets behave in ways they didn’t anticipate. “The largest cause of frustration is loss, but it could also be that a trader didn’t gain as much profit as they thought they would.”
Even the best UK shares will make losses at some point. I don’t rush to sell when that happens, but check to see if my original investment case still holds. If it does, I take a deep breath then wait for the recovery.
Getting bored even by the best shares
If investors feel their portfolio isn’t delivering enough action, they may take unnecessary risks to stir up some excitement, Beauchamp also says.
I’ve done this. Usually when I’ve been checking my portfolio once too often, to see how it’s getting on. Now, I only check its progress every few weeks. I trust myself to pick the best UK shares I can. Then let them get on with it.