With the world constantly changing, investing can be challenging. To improve your returns, it's important to avoid common investment mistakes.

A recent article published in the Australian Financial Review discussed six investment mistakes that may be affecting your investment returns. 

As the article points out, biases can affect even the savviest of investors. Let's explore the six common mistakes.

Buying the dip always works out

During the recent 'Liberation Day' market downturn, a record number of retail investors bought in the dip. For anyone who has bought shares in the past 30 years, this strategy has generally been a successful one. 

From 1987 onwards, the Federal Reserve has been able to successfully rescue the US economy from recessions. However, this has not been the case for all markets. After Japan's Nikkei Index peaked in 1989, it took the market more than 30 years to recover, despite the efforts of the Central Bank. 

Those buying the dip, assuming the Fed will always be able to rescue the market, would be wise to familiarise themselves with the history of the Japanese stock market.

Stocks always outperform bonds

The Australian stock market has outperformed bonds over the long term. According to the 2024 Vanguard Index Chart, over the past 30 years, Australian shares have increased 9.1%, outperforming Australian bonds, which have increased 5.6% over the same timeframe.

However, this is not always true, especially when considering shorter timeframes. On 15 May, Woodside Energy Group Ltd (ASX: WDS) listed a 6% coupon bond. Given that Woodside's share price is down 20% in the past year, the bond could outperform equity while offering much more certainty.  With several exchange-traded (ETF) corporate bond funds now available, this asset class may be of interest to ASX investors. For example, for a management expense of 0.25%, the Betashares Australian Investment Grade Corp Bd ETF (ASX: CRED) provides exposure to a portfolio of senior, fixed-rate, investment-grade Australian bonds.

Gold and crypto only go up

For recent investors in gold or crypto, any dip has been short-lived. If you've invested in gold since 2015, it has consistently reached new all-time highs. Similarly, crypto investors have weathered significant volatility but always come out on top.

With gold recently peaking at $3,500 and Bitcoin back to above $100,000, investors have been taught that these assets only go up. However, those who invested in gold in the 1980s will be more inclined to believe that a gold surge is unsustainable.

US stocks always deliver

Investors have become accustomed to the US market offering the strongest returns of any exchange in the world. Anyone who has invested in US stocks over the past 20 years has likely done well for themselves. The S&P 500 Index (SP: .INX) is up nearly 400% over this timeframe. However, this performance has been largely driven by the blockbuster performance of the Magnificent 7, which now makes up 30% of the index. Those who invested in the Russell 2000 Index have been less fortunate, with the index up around 200% in 20 years.

It's also worth noting that many technology stocks failed to recover from the Dotcom crash, which occurred between 2000 and 2001. In the 40 years before 1990, European, Australian, and Asian markets outperformed the US stock market, challenging this bias.

Growth always beats value

The momentum of the Magnificent 7 stocks over the past few years has created the perception that growth stocks will always outperform value stocks. However, the world's most famous value investor, Warren Buffett, has refuted this. While several popular growth stocks such as Tesla and Amazon are down for the year to date, Berkshire Hathaway has risen 12%.

Cash is always a poor investment

Cash has underperformed almost every asset class over a 30-year period. For those who started investing in 2010, it returned almost nothing after inflation. However, with the cash rate sitting at around 4% for most of this year, term deposits have beaten many stocks. In Australia and the US, investments in bonds or private credit have also beaten many indices by a substantial margin.

Foolish Takeaway

Bias affects just about everyone. When it comes to investing, if you've lived through certain market conditions, you're more likely to expect them to occur again in the future. To get around this, it often pays to look at longer data sets and consider whether conditions have changed. Your investment portfolio might thank you for it down the track.