5 Mistakes Even Smart Investors Make (And Keep Making)

Most retail investors who underperform do not underperform because of what they don't know. They underperform because of what they do repeatedly, in full knowledge that it is wrong. This is an uncomfortable thing to say, but it matches every behavioural finance study ever conducted. And it is why 'read more investing books' is almost never the real fix for portfolios that disappoint their owners.

These are the five mistakes I see most often across my client base, including from people with advanced degrees, successful professional careers, and genuinely extensive reading in investing. Knowledge is not the limiting factor. Discipline is. The structural protection against each of them is a written process that makes the mistake harder to make in the first place, not more information about why the mistake is bad.

Mistake 1: Overtrading

The average retail investor makes 10 to 40 trades per year. The correct number for a long-run compound portfolio is closer to 4 to 8. Every extra trade is a small tax on returns: bid-ask spread, commission, capital gains event. On top of that sits the larger hidden cost of making a behavioural decision that was not needed in the first place. That hidden cost is where the real damage accumulates.

Barber and Odean's study of 66,000 retail brokerage accounts found the most active traders underperformed the least active by 6.5% per year. The gap was not explained by poor stock selection. It was explained by the sheer volume of decisions being made under uncertainty. More decisions means more opportunities to be wrong, and humans are statistically wrong more often than right when making rapid financial decisions under emotional pressure.

If you find yourself checking your portfolio multiple times a day and adjusting positions based on what you see, the portfolio is not the problem. The behaviour is. The structural fix is a written rule that drops review frequency to fortnightly and forbids any trade within 24 hours of a new idea. That one rule alone removes most of the overtrading damage from most retail portfolios.

Mistake 2: Panic selling

Every major market fall since 2000 has produced the same pattern in retail brokerage accounts: 2008, 2020 COVID, 2022 inflation shock, the 2024 banking stress. Investors sell near the bottom, crystallising losses, then watch the market recover from outside the market. They miss the upswing. By the time they feel safe enough to re-enter, the prices are materially higher than where they sold.

JP Morgan's annual Guide to Retirement has tracked the cost of this behaviour for 20 years. Missing just the 10 best days in a 20-year period cuts total returns by more than half. Those 10 best days almost always come within two weeks of the 10 worst days, during the panic. Investors who sell during the panic almost always miss the rebound, because selling and staying out require essentially the same mental state.

The sell signal you feel in a market fall is not information. It is cortisol. The portfolio you hold through the fall is the same portfolio you held before the fall, just temporarily repriced by panic in other accounts. Selling crystallises the loss that only existed on paper, and removes you from the recovery that will eventually come. Every behavioural finance textbook contains this point; most retail investors continue to ignore it during the next fall.

Mistake 3: Chasing winners

When a stock, sector, or asset class has just had a spectacular year, it attracts capital. The logic 'this has been going up so I should buy it' sounds like trend-following, which is a legitimate quantitative strategy. It is not the same thing. Trend-following uses specific rules, tight stops, and position sizing that accounts for drawdown risk. Retail chasing of winners uses emotion, narrative, and no stops whatsoever.

Morningstar's 2024 Mind the Gap study found the average investor in the 50 best-performing US equity funds over the previous decade earned 2.3% per year less than the funds themselves. The gap was almost entirely explained by late entry and early exit around peak performance. Investors bought in after the returns had already been captured, then sold after the first material underperformance. The returns shown on the fund's marketing sheet were never available to the investor who held the fund.

If you find yourself buying an asset primarily because it went up a lot recently, you are probably buying somebody else's realised gain. The statistical pattern over decades of retail trading data is almost completely consistent on this point. Past performance attracts flows; flows typically arrive after the outperformance has happened; subsequent returns disappoint. The fix is simple: no asset is considered for purchase purely on recent price action.

Mistake 4: Ignoring drawdown

Most retail investors focus on return as the primary portfolio metric. Returns are the number that appears on the statement, the number that gets compared with friends, the number that goes in the annual review meeting. Drawdown, the worst-case loss the portfolio has actually suffered along the way, almost never gets calculated or tracked. This is the biggest single gap between retail and institutional portfolio construction.

The arithmetic is why drawdown matters. A 50% drawdown requires a 100% gain to recover, a 60% drawdown requires 150%, and a 75% drawdown requires 300%. Returns and drawdowns are not symmetric, and ignoring the second half of that equation means building a portfolio that produces strong returns in good years but cannot survive the bad years without permanent damage. The first 50% of a portfolio is cheap and the last 50% is expensive.

For anyone approaching retirement, drawdown is more important than return. A portfolio returning 12% per year with a 50% worst drawdown is worse than one returning 9% with a 25% worst drawdown, if retirement hits at the wrong point in the cycle. The second portfolio is what serious money looks like. The first is what retail speculation looks like dressed up with good years and a selective memory.

Mistake 5: No clear process

This is the mistake that makes all four of the others worse. When there is no written process for how stocks get selected, sized, entered, held, and exited, every decision becomes an emotional decision in the moment of deciding. Without a process, there is no framework to defer to when markets are chaotic and feelings are strong. The investor becomes the single point of failure in their own plan, and investors under stress are unreliable. The kind of quantitative framework that closes this gap is what I walk through in how professional investors actually analyse stocks.

A clear process is a document, not a feeling. It specifies what quantitative criteria a stock must meet before it is considered, how position size is determined, what triggers a sale, how often the portfolio is reviewed, and what will never be done regardless of how the market is behaving. A one-page document covers most of what matters. Write it on a calm Sunday morning when you have no positions in play and no recent market drama to distort the thinking.

Most retail investors do not have this document. Most professional investors do, and they follow it, and they are held accountable for following it. The presence or absence of the document is the single largest behavioural difference between the two populations, and it explains most of the return gap between them. Knowledge is not what separates professionals from amateurs; written discipline is.

The common thread

All five mistakes share the same structural feature: they are behavioural, not informational. Knowing they are mistakes does not stop smart, educated, professionally successful people from making them. The protection is not more knowledge. The protection is a systematic process that removes the moments when the mistake could be made in the first place, so the decision does not depend on discipline in real time.

That is why the GIP framework reviews fortnightly rather than daily, uses quantitative screens rather than narrative selection, holds 20 to 25 positions rather than 3 to 5, and treats drawdown as a primary screen rather than a backward-looking curiosity. The structure exists to prevent the investor from being the limiting factor in the investor's own portfolio. It removes the moments when panic selling, overtrading, chasing winners, and ignoring drawdown would normally occur. The full structural framework that supports all this is in how to build a portfolio that lasts decades.

It's not what you don't know that hurts returns. It's what you do repeatedly.

Frequently Asked Questions

What are the most common investing mistakes UK 2026?

The five most damaging mistakes, persistent across market cycles, are overtrading (average 10-40 trades per year versus optimal 4-8), panic selling during market falls, chasing winners after they have already performed, ignoring drawdown as a portfolio metric, and having no written investment process. All five are behavioural, not informational, which is why knowledge of them does not prevent them. The protection is a written process that removes the moment when the mistake could be made.

Why do smart people make bad investing decisions?

Intelligence and education do not protect against behavioural error in investing. Barber and Odean's study of 66,000 retail accounts found the most active traders underperformed the least active by 6.5% per year regardless of education level. The protection is not more knowledge but a written systematic process that removes discretionary decision-making during emotionally charged moments. The document constrains the investor's future self from making decisions the present self knows are wrong.

How do I stop overtrading my portfolio UK?

Move portfolio review from daily to fortnightly or monthly. Establish a written rule that no trade can be placed in the first 24 hours after a new idea or news item. Target 4-8 trades per year for a long-run compound portfolio, not 40. Hold positions for 1-3 years rather than 1-3 months. Track the behavioural cost of each unnecessary trade (spread, commission, tax, decision error) as a line item in your annual review.

How do I avoid panic selling during market crashes UK?

Pre-commit to the behaviour in writing before the fall happens. The written rule should specify: no sales will be made in the first 30 days of any market fall of more than 15%; rebalancing into the fall (adding to quality positions) is permitted; portfolio review frequency will not change. Having the rule in writing before the cortisol response kicks in is the only reliable protection against selling near the bottom. The rule exists because in-the-moment judgement cannot be trusted during panics.

What is chasing winners in investing and why is it bad UK?

Chasing winners means buying an asset primarily because it has recently performed well, without independent quantitative or fundamental justification. Morningstar's 2024 Mind the Gap study found retail investors in the top 50 best-performing US equity funds over 10 years earned 2.3% per year less than the funds themselves, entirely explained by late entry at peaks and early exit at first underperformance. You are typically buying somebody else's realised gain. Past performance attracts flows; flows arrive after the performance happens; subsequent returns disappoint.

What is an investment process and how do I build one UK?

An investment process is a written document, typically one page, that specifies: the quantitative screens a stock must pass before consideration (CROCI, PEG, Sortino, Sharpe, Calmar); position sizing rules; entry and exit triggers; review frequency; and the behaviours that are forbidden regardless of market conditions. The document exists to be referenced during emotionally charged moments when discretionary judgement would otherwise produce a behavioural error. Write it on a calm Sunday morning when you have no open positions and no recent drama to distort the thinking.

Related reading

→ How Professional Investors Actually Analyse Stocks: The Filter Framework That Rejects 94% Before Selection

→ How To Build A Portfolio That Lasts Decades: The Grown-Up Money Framework

→ How To Catch Up On Investing Without Taking Big Risks

Sources

Barber, B. and Odean, T. (2000). Trading Is Hazardous to Your Wealth. Journal of Finance. | JP Morgan Asset Management (2024). Guide to Retirement. | Morningstar (2024). Mind the Gap: A Report on Investor Returns. | Kahneman, D. (2011). Thinking, Fast and Slow. | Dalbar (annual). Quantitative Analysis of Investor Behaviour. | Graham, B. (1973). The Intelligent Investor.

Alpesh Patel OBE is a hedge fund manager, Bloomberg TV alumnus, Financial Times author, and former Visiting Fellow at Corpus Christi College, Oxford. He is the founder of the Great Investments Programme.

This article is for educational and informational purposes only. It does not constitute personal financial guidance. Past performance is no guarantee of future results. Capital is at risk.