Behavioral Finance

Bad Habits and Good Practices

Topics - Behavioral Finance Asset Allocation

${ numberSection } ${ text }
Bad Habits and Good Practices

Good investing results require more than just good investments. They need good investors, too. This article lays out the three bad habits that the authors believe are the most common hurdles that keep bad investors from becoming good ones.

The first and most widespread bad habit is the natural tendency of investors to buy multiyear winners and sell multiyear laggards — whether asset classes, strategy styles, single stocks or funds. (This error contrasts with the practice of buying stocks that have risen a lot in the last few months — a widely accepted strategy called “momentum investing.”)

The second bad habit is the sin of under-diversification. Many investors underappreciate or underutilize the potential benefits of diversification in various ways. Others value it, but still have less in their portfolios than they think. The authors assert that the most serious diversification problems for institutional investors are home bias and excessive dependence on equity market direction.

The third common bad habit is a bias toward “comfortable” investments — limiting oneself only to individual securities or asset classes that are familiar or convenient. Such investments can be overpriced, and thus deliver lower long-term returns. Investors willing to step out of their comfort zones — for example, by using leverage, shorting or derivatives — can measurably be able to improve their risk-adjusted returns.

Published In

Journal of Portfolio Management

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.