Global stock markets are buoyant again, but these mistakes could spoil the party for investors in 2025.
Investing mistake 1: Thinking stock market returns are predictable
Looking at the 33% rise in the Morningstar US Market index in 2024, your first assumption would be that US stocks will have another great year in 2025. This rear-view mirror thinking can trip investors up.
'When investors look back on what happened in the markets, they find often easier to rationalise and to provide explanations for each development, even though they could not spot the signs before,' said Nicolò Bragazza, Associate Portfolio Manager at Morningstar Investment Management.
This is dangerous because it assumes the future is predictable, he adds.
'This ex-post rationalisation might lead into thinking that also the future lay on only one possible path, prompting them to stay less diversified than what would be wise.'
'However, the future is just a single occurrence among a large number of other possible outcomes and, given the radical uncertainty in which investors find themselves, it is always better to think of the future as a collection of potentially different paths and to prepare accordingly.'
Investing mistake 2: Stock winners stay the same
Connected to this mistake is the assumption that this year’s market winners will perform the same victory lap in 2025.
Artificial intelligence continues to dominate investor sentiment and stocks related to AI have soared in the past few years. Nvidia NVDA is up around 180% in 2024, while cloud hosting platforms such as those from Amazon.com AMZN, Alphabet GOOGL, and Microsoft MSFT have also seen strong growth.
The Magnificent Seven stocks enjoyed big gains in 2024, following on from a strong 2023. Maybe you are wondering: 'Why should I look elsewhere for investments when these stocks are doing so well?'
'The tendency of thinking that winners should keep on winning is called ‘hot hand fallacy’ and, although it may work in some cases, it is not a valuable strategy to achieve good results over the long term,' says 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, even though no one questions that it is a transformational technology with the potential to change our daily lives, finding the main beneficiaries of it is very hard and today’s winners may not be tomorrow’s biggest winners.'
Investing mistake 3: The Fear of Missing Out (FOMO)
Is it a good idea to jump into the market now?
'With markets at record highs as 2024 ends, some investors are regretting not having taken enough risk and, as a way to offset the missed gains, they might jump onto the markets chasing the rally at very rich valuations. This behavior is called FOMO, fear of missing out, as some investors who are late into the party feel to urge to participate,' Bragazza says.
'The anxiety of missing further gains leads them into poor investment decisions that can impair future portfolio returns. After a strong rally, taking a step back to re-assess investment opportunities can be a very useful exercise and a way to position the portfolio for better gains in the future,' he adds.