Investing can be complicated, especially if you have no experience with the basics of personal finance. Avoiding the following six investing mistakes will help everyone — from the new investor who is just learning, to an experienced investor who needs a refresher — achieve success in the markets.
Decisions Made Only By Emotion can bring disastrous results, just as decisions made only from a computer program can also pose a problem. Emotional decisions are often tainted with biases. For example, trying to time the market. When the market rises, people’s confidence increases, and they want to invest more. When the market declines, investors like to pull money out, and wait on the sidelines. This activity promotes buying high and selling low.
Focusing Too Much On Historical Returns. Investors often get caught by relying too much on historical returns and not giving enough importance to future expectations. The future investment situation is likely to be different from time-aged averages. ast averages may have little bearing on the current environment and therefore the actual returns you receive.
Putting All Your Eggs in One Basket. Over time, a diversified portfolio provides the best combination of reasonable returns with bearable volatility. There’s no such thing as the perfect investment. All stocks carry risks. Funds that bundle stocks can reduce the risk, mitigating harsh downturns but muting spikes as well. Bonds can counterbalance stock losses, but over long periods bond returns trail the returns of the stock market.
Too Much Attention Given to Financial Media. There’s almost nothing on financial news shows that can help you achieve your goals. Turn them off. If anyone really had profitable stock tips, trading advice or a secret formula to make big bucks, would they blab it on TV or sell it to you for $49 per month? No, they’d keep their mouth shut, make their millions and not have to sell the knowledge to make a living. Spend less time watching financial shows on TV, and spend more time creating — and sticking to — your investment plan.
Not Reviewing Your Portfolio Regularly. Even the best portfolios can go off-target over time. Investments need to be reviewed often. It may make sense to sell losers for tax purposes, or sell some of your winners to move money into your laggards (rebalancing). This disciplined approach to investing helps ensure that you’re buying lower and selling higher, which certainly beats the buy-high-sell-low trap that snares many investors.
Impatience should be avoided, since a great deal of patience is required to invest. Making rash decisions, in any case, can be problematic. Most of us have been trained by society to expect “instant gratification.” The truth is, life doesn’t work that way — and neither does investing.
Investors who recognize and avoid these mistakes give themselves a great advantage in meeting their investment goals. Obviously, there are additional mistakes. In fact, we could go on and on, but these are some of the more common errors investors make.
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