Chasing performance, being afraid of losing something and focusing on the negative aspects are three common mistakes that many investors can make. Trying to time the market also kills returns. Even institutional investors often don't do it successfully. A well-known study, Determinants Of Portfolio Performance (Financial Analysts Journal, 198), conducted by Gary P.
Beebower, analyzed the returns of US pension funds. This study showed that, on average, almost 94% of the variation in returns over time was explained by investment policy decisions. In other words, most of the return on a portfolio can be attributed to the asset allocation decisions that are made, not by the moment or even by the selection of securities. When it comes to environmental, social and governance (ESG) investing, many advisors still don't understand it and avoid offering ESG portfolios to clients.
To help advisors avoid making mistakes when it comes to ESG investing, here is a list of the top mistakes to avoid: Loss Aversion - Loss aversion or the endowment effect can lead to poor and irrational investment decisions. Investors may refuse to sell investments that generate losses in the hope of getting their money back. Warren Buffett often illustrates that investors would get better long-term investment results if they had an imaginary punched card with space for only 20 holes and every time they made an investment throughout their life they had to drill it.
Ignoring Short-Term Movements
- Many investors make investment decisions based on short-term movements in the share price.In general, investors would make better investment decisions if they ignored the daily movements in stock prices and focused on the medium-term outlook of the underlying investment and analyzed the price compared to those perspectives.
Not Knowing What Makes a Company Sustainable
- With more than 500 ESG funds and ETFs available in the United States, advisors are often reluctant to offer an ESG portfolio because they are not experts in what makes a company sustainable or what sustainable innovations will have the most impact or will be most profitable. To determine which ESG funds are the most appropriate, advisors should examine the degree of inclination of ESG towards more sustainable fund actions, the level of shareholder participation, and the manager's commitment to sustainability in general. By avoiding these common mistakes when it comes to sustainable investing, advisors can create an ESG solution that is a blessing for their company rather than a burden.Jay and his colleagues are working to find solutions to each of these three challenges, such as Owning Impact, an executive course that helps family foundations create socially conscious investment strategies; the Climate Pathways project, which helps key decision makers adopt evidence-based climate policies; and the Aggregate Confusion project, which helps companies evaluate sustainability performance.
