How to invest money: The 5 investment mistakes beginners and pros make

How to invest money: The 5 investment mistakes beginners... and professionals do too

How to invest money is the process of allocating financial resources with the goal of achieving returns and managing risk.

Investment mistakes are recurring failures in financial decisions that reduce returns and happen in both beginners and professionals. The most common investment mistakes are not the exclusive preserve of beginners. Professional managers fall into the same biases, with an aggravating factor: they charge to avoid them. According to the SPIVA study by S&P Dow Jones Indices, around 90% of active equity managers globally fail to beat their benchmark over a 10-year horizon. Daniel Kahneman, Nobel Prize winner and father of behavioral economics, summed it up in a phrase worth remembering: he has 40 years of experience with cognitive biases and still makes the same mistakes. If he makes them, you will too. The question is not how to eliminate them, but how to build a system that compensates for them.

Why do beginners and professionals make the same mistakes?

Because cognitive biases are universal and are not eliminated by education, certifications, or a Bloomberg terminal on the desk. The habitual narrative separates the emotional retail investor from the rational professional manager. Academic evidence from the last three decades destroys that separation.

Kahneman, in a talk cited by the CFA Institute, put it plainly: within the asset management profession many people believe they generate alpha even when they do not. It is pure overconfidence. And most importantly: even after four decades studying these errors, he still falls into them. Knowing the bias is not the recipe to avoid it.

The SPIVA study from S&P Dow Jones Indices, which measures quarterly the performance of active managers versus their benchmarks, confirms the scale of the problem. Approximately 90% of active equity managers and 81% of fixed income managers underperform their index over 10 years. Morningstar, in its Active/Passive Barometer published in 2026, reaches a similar conclusion: only 38% of active funds beat their passive peers during 2025, and only 21% survived and outperformed the index at 10 years. Most professionals not only do not add value, they destroy net value through fees.

Here is the table that connects each mistake with its underlying psychological bias and with the documented academic evidence. The same mistakes, the same biases, evidence for both types of investor.

Error 1: Why does overtrading destroy returns?

Each additional trade typically reduces net performance. The bias is called overconfidence and is probably the most costly of all. Brad Barber and Terrance Odean documented it in a classic 2000 paper (Trading is Hazardous to Your Wealth) analyzing 66,000 real accounts of a U.S. broker: the investors who traded most obtained a noticeably lower annual return than those who barely touched their portfolios. The academic conclusion is clear: each additional trade, on average, destroys value.

The professional falls into the same trap under a different guise. The pressure to justify fees, to show activity to the committee, to react to every piece of research, leads to the same overtrading. That is why almost all active funds have annual turnover between 50% and 100%, and why, as SPIVA shows, almost all lose against the index once transaction costs and fees are discounted.

The practical signal: if you review your portfolio more than once a quarter, you are most likely trading too much.

Error 2: How is good diversification different from holding many funds?

True diversification is by asset class, geography, sector and factor, not by number of lines. Holding ten funds is not diversification. If those ten funds all invest in large U.S. tech companies, your portfolio is concentrated even if it appears spread out.

The dominant bias here is home bias: the universal tendency to overweight the local market because it is familiar. A Spanish investor who has 40% of their portfolio in Spanish companies is overweighting a market that represents barely 1% of global market capitalization. The professional commits the same error structurally: many European active funds carry a systematic domestic bias.

The practical rule: a global index fund that tracks something like the MSCI World or an equivalent all-cap world index gives you geographic and sector diversification by default. Any deviation from that should be a conscious decision, not an accident. For those seeking alternatives, such as investing in small businesses and SMEs can be a different path, but it requires specific evaluation of risk and liquidity.

Error 3: Why is selling in panic and buying in euphoria harmful?

Yes. Loss aversion causes most people to sell late in a drop and buy late in a rise. The bias is called loss aversion and was formalized by Kahneman and Amos Tversky in their 1979 Prospect Theory: the pain of losing weighs roughly twice as much as the pleasure of gaining the same amount.

Dalbar has been measuring this gap since 1994 in its Quantitative Analysis of Investor Behavior. In 2024, the average U.S. equity investor obtained 16.54% versus the S&P 500's 25.02%: an 848 basis points gap, the second largest difference of the decade according to Dalbar. Over 20 years, the accumulated gap turns an initial $100,000 into $586,000 instead of $717,000. Almost a fifth of the final wealth disappears, not because of the market, but because of investor behavior.

Professionals make it less visible, but they do it too. Net outflows from active funds during large corrections are systematic and well documented. When fear arrives, the professional manager also sells.

Error 4: Why does chasing last year's winner almost never work?

Because past winners rarely repeat; recency bias overweights the latest events. Kent Smetters, a Wharton professor, documented that even among the few active managers who beat the index in a year, only 20% repeat the feat the next year; the probability of three consecutive years is 10%.

The professional falls into the same trap when repositioning the portfolio toward sectors that have already risen, because it is what the client wants to hear and because their own brain extrapolates the same way as the retail investor.

Error 5: Why ignore small-seeming costs?

Because small annual fees become very large differences over decades. The bias here is anchoring: you anchor on the absolute figure ("only 15 euros on 1,000") without projecting it over the long term. An annual fee of 1.5% versus 0.2% can destroy 30-35% of the final wealth over 30 years due to compounding.

Morningstar, in its annual industry reports, has persistently documented that costs are the factor that best predicts whether a fund will beat its benchmark. Index funds have average fees of 0.1-0.2% annually versus active funds at 1-1.5%. That difference, multiplied over decades and by compounding, explains much of the active-passive gap documented by SPIVA and Morningstar.

Is it possible to invest with 100 euros a month?

Yes — you can start with 100 euros a month and build wealth over time through automatic contributions and low-cost index funds. Periodic contributions take advantage of dollar-cost averaging and compounding; the key is minimizing fees and keeping a long horizon.

Automatic contributions reduce the risk of trying to time the market and the occasions to make behavioral mistakes. Even small amounts, consistently invested with low fees, end up having a significant impact.

What really works to reduce mistakes and how to invest monthly with little money?

Very little based on willpower. Almost everything that works is designing a system that reduces the number of decisions you make in the heat of the moment. The honest answer is: your process matters more than your judgment in the moment.

1. Automatic contributions on a fixed date. The same day each month, the same amount, automated. If you decide it each time, you will fail sooner or later.
2. One large decision per year. Define in advance, in January, what percentage of the portfolio in global equity and what percentage in other assets. The rest of the year, do not rebalance unless it deviates more than 5 percentage points.
3. Fees below 0.3% annually. This is not an aesthetic preference, it is compound math.
4. Global diversification by default. An MSCI World fund or equivalent all-cap world fund covers 99% of most investors' needs. Any deviation requires a conscious and justified decision.
5. Do not check your balance more than once a quarter. The less you look, the fewer decisions you make, the fewer mistakes you commit.

These five mechanisms do not eliminate biases. They reduce the number of moments in which a bias can become a trade. They are systems, not willpower.

Kahneman, in the same CFA Institute talk, left this clue: the individual cannot do much against their own biases, but organizations can improve decision quality by designing processes that neutralize them. The translation for the retail investor is exactly that: your portfolio needs a fixed process, not your best judgment in the moment. Your best judgment in the moment is precisely what will cost you dearly.

How to invest money without a clear process often leads to mistakes that reduce returns.

To dig deeper into the academic evidence on active management performance you can consult the official SPIVA page at S&P Dow Jones Indices, and for Kahneman’s central ideas applied to investing the CFA Institute article is the most accessible reference.