Global stock markets are buoyant again, but these mistakes could spoil the party for investors in 2025.
Given the 33% rise in the Morningstar US Market index in 2024, your first guess would be that US stocks will have another strong year in 2025. This thinking in the rearview mirror can trip up investors.
“When investors look back at what happened in the markets, they often find it easier to rationalize and provide explanations for each development, even if they couldn’t spot the signs before,” said Nicolò Bragazza, associate portfolio manager at Morningstar Investment Management.
This is dangerous because it assumes that the future is predictable, he adds.
“This ex post rationalization could lead them to think that the future has only one possible path, which would encourage them to remain less diversified than would be wise.
“However, the future is only a single event among a large number of other possible outcomes and, given the radical uncertainty investors find themselves in, it is always best to view the future as a set of potentially different pathways and to prepare accordingly.”
Investing Mistake #2: Winning Stocks Keep Winning
This error is linked to the assumption that this year’s market winners will do the same thing in 2025.
Artificial intelligence continues to dominate investor sentiment, and AI-related stocks have soared in recent years. Nvidia NVDA is up 192% year to date, while cloud hosting platforms such as Amazon.com AMZN, Alphabet GOOGL, and Microsoft MSFT have also seen strong growth.
Stocks in the Magnificent Seven posted big gains in 2024, following a strong 2023. You may be wondering, “Why should I look elsewhere for investments when these stocks are doing so well?”
The tendency to think that winners must keep winning is called the “hot hand fallacy” and, although it can work in some cases, it is not a valid strategy for achieving good results in the long run. term,” explains Mr. Bragazza.
“This fallacy goes against the idea that things revert to the mean and, therefore, it exposes investors to significant risks if sentiment turns and winners become losers. And when it comes to AI, although no one questions the fact that it is a transformational technology with the potential to change our daily lives, it is very difficult to find the main beneficiaries and today’s winners may not be tomorrow’s biggest winners.”
Investment mistake #3: fear of missing the right entry point
Is it a good idea to enter the market now?
“As markets reach record highs at the end of 2024, some investors regret not having taken enough risk and, to compensate for missed gains, they are jumping into the markets in search of a rally at very high valuations. This behavior is called FOMO (fear of missing out), because some investors who are late to the party feel the need to participate,” says Bragazza.
“The anxiety of missing out on further gains pushes them to take poor investment returns, which can harm future portfolio returns. After a strong rally, taking a step back to reassess investment opportunities can be a very useful exercise and a way to position the portfolio for better gains in the future,” he adds.
© Morningstar, 2024 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be considered as an invitation or encouragement to buy or sell the securities mentioned. Any comments are the opinion of the author and should not be considered a personalized recommendation. The information in this document should not be the sole source for making an investment decision. Be sure to contact a financial advisor or financial professional before making any investment decisions.
The author(s) have no ownership interest in any securities mentioned in this article. Learn more about Morningstar’s editorial policies.
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