- Investing without a clear plan of action.
Many people neglect to take the time to think about their needs and long-term financial goals before investing. Unfortunately, this often results in their falling short of their expectations. You should decide whether you are interested in price stability, growth, or a combination of these. Determine your investment goals. Then, depending on your timeframe and your tolerance for risk, select investment option with objectives similar to yours.
- Meddling with your account too often.
You should have a clear understanding of your investments so that you are comfortable with their behavior. If you keep transferring investments in response to downturns in prices, you may miss the upturns as well. Even in the investment field, the “tortoise” who is more patient, may win over the “hare”. While past performance does not necessarily guarantee future performance, your understanding of the behavior of various investments over time can help prevent you from becoming short-sighted about your long-term goals.
- Losing sight of inflation.
While you may be aware of the fact that the cost of goods and services is rising, people tend to forget the impact inflation will have on investments in the long-term. You have to keep in mind that inflation will eat into your savings faster than you can imagine.
- Investing too little too late.
People do not “pay themselves first”. Most people these days have too many monthly bills to pay, and planning for their future often takes a backseat. Regardless of age or income, if you do not place long-term investing among your top priorities, you may not be able to meet your financial goals. The sooner you start, the less you have to save every month to reach your financial goals.
- Putting all your eggs in one basket.
When it comes to investing, most of us do not appreciate the importance of diversification. While we know that we should not “put all our eggs in one basket”, we often do not relate this concept to stocks and bonds. Take the time to discuss the importance of diversifying your investments among different asset categories and industries with your financial advisor. When you diversify, you do not have to rely on the success of just one investment.
- Investing too conservatively.
Because they are fearful of losing money, many people tend to rely heavily on fixed-income investments such as bank fixed deposits and company deposits. By doing this, however, you expose yourself to the risk of inflation. Consider diversifying with a combination of investments. Include stock funds, which may be more volatile, but have the potential to produce higher returns over the long term.
- Unrealistic expectations.
As we witnessed during the recent bubble, investors can periodically exhibit a lack of patience that leads to excessive risk-taking. It is important to take a long-term view of investing and not allow external factors cloud actions and cause you to make a sudden and significant change in strategy. Comparing the performance of your portfolio with relevant benchmark indexes can help an individual develop realistic expectations,
- Not knowing your real tolerance for risk.
Keep in mind that there is no such thing as risk-free investing. Determining your appetite for risk involves measuring the potential impact of a real dollar loss of assets on both your portfolio and your psyche. In general, individuals planning for long-term goals should be willing to assume more risk in exchange for the possibility of greater rewards. However, don’t wait until a sudden or near-term drop in the value of your assets to conduct an evaluation of your level of tolerance for risk.
- Making Emotional Decisions.
It’s true that investing is part science and part art. Because of this, generally speaking, successful investing should contain elements of each. Decisions made purely 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, when an investor buys a particular investment and it subsequently rises, they may adopt the belief that they were sure that would happen. Conversely, if the investment declines, they may convince themselves that they had a hunch that could happen as well. This inconsistency is because human behavior has a tendency to arrange our thoughts to fit the thesis of the moment.
- Avoid Water Cooler Recommendations.
Just because a friend recommends a particular investment it does not necessarily mean it’s a good choice. Moreover, there are some important issues to consider. Here’s how a typical conversation unfolds. A friend tells you about this great mutual fund they own (never mind the ones that didn’t work out). “In fact,” they say, “last year it returned X%!” “Wow,” you reply. “That’s more than I got!” Perhaps it really did do well. But here’s the relevant question. Will its performance be replicated? In other words, will the following year be as good as the previous year? Odds are not in your favor on that one. In fact, if you make your decision based solely on past returns, you stand a good chance of being disappointed. There are a number of important statistics to consider when investing, but past returns have very little to do with future returns. And, funds that were at the top of their peer group one year, often do not remain there the following year.
Summary
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. To reduce your mistakes remember, be patient and even though it goes against how you may feel at a given moment, try to adopt a contrarian point of view. In other words, don’t follow the crowd. Because emotional investing can be so damaging, a very large percentage of wealthy and affluent individuals delegate this task to a qualified advisor. This is one way to remove some of the emotion from the equation.
