Investing can be complicated especially if you have no experience with the basics of personal finance. Avoiding the following top 6 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 the most common emotional investing decisions I see is when people try 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. We should take a page out of Warren Buffet’s book and increase our buying when the market declines and investments are on sale.
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. Past averages may have little bearing on the current environment and therefore the actual returns you receive.
Putting all your eggs in one basketis not the best idea.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.Researchers at fund company T. Rowe Price compared the returns of portfolios that varied from 100 percent bonds to 100 percent stocks with various combinations of stocks, bonds and cash. From 1985 through 2012, a portfolio of 60 percent stocks, 30 percent bonds and 10 percent cash would have returned 9.8 percent annualized (about 93 percent of the return of an all-stock portfolio, but with just 62 percent of the risk).
Too Much Attention Given to Financial Media is actually wasting your time.There is almost nothing on financial news shows that can help you achieve your goals. Turn them off. There are few newsletters that can provide you with anything of value. 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? I think they’d keep their mouth shut, make their millions and not have to sell a newsletter to make a living. Spend less time watching financial shows on TV and reading newsletters. 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 needs to be avoided since you require a great deal of patience when investing. 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. For example, there are numerous instances where an investment severely lagged for many years before it turned around and became a top performer. This is not at all unusual. Therefore, assuming you have chosen a quality investment, to maximize its return you need to be prepared to hold it through a complete cycle to allow the manager’s strategy to play itself out. How long is a complete cycle? This can only be answered after the fact. It’s the same with identifying the end of a recession. It’s normally several months after the fact before we realize a recession has actually ended.
Investors who recognize and avoid these common mistakes give themselves a great advantage in meeting their investment goals. Obviously, there are additional mistakes. In fact, we could probably go on and on, but these are some of the more common errors investors make.