In life mistakes happen. When it comes to the investment world, mistakes also happen. It could happen because you bought the expensive hottest stock in the market. Or you underestimate the possibility of a company going bankrupt. The world is changing at such a fast pace that – Decisions are made under future uncertainty. Given how difficult it is to predict the future, and how a specific stock will perform. It is common for a number of mistakes to happen. Peter Lynch once said that to be a successful investor you had to have six winners out of ten. His assessment isn’t far from the truth.
Markets are driven in an emotional way sometimes. When this happens, overreactions are common. You can witness this both in bull and bear markets. Not all mistakes are the same, and ultimately it is important to learn as you make mistakes. Having stocks that perform badly does not necessarily mean you made a mistake.
You see, markets can misprice things for quite some time. As some market participants start experiencing euphoria and greediness, or panic and fear. As astute investors, we should remain highly rational during the ups and downs. It is of the utmost importance to have a clear and defined strategy. No matter what happens you should stick to your clearly defined plan. This will prevent you from losing money. As error of judgment might occur, influenced by emotions.
The risks associated with investments are constantly downplayed by some market gurus and institutional members. Despite that investors should be aware of the risks, and ultimately look at themselves. Investment decisions are personal decisions. They should be made according to your specific personal situation. To ensure you avoid making any mistakes when investing – Here are nine common mistakes that can occur and how to avoide them:
- Define a strategy
We cannot stress this enough. Having an investment plan or strategy is key to great returns. By following your pre-defined strategy you will make sure you make fewer mistakes. Not only but allows you to organize your portfolio with a goal in mind. This way you will avoid decisions that go against your specific goal, portfolio allocation and risk-tolerance. By ensuring you stick to the plan, you will make better investment decisions. Preventing speculation and trend following or herd mentality.
- Stick to the strategy
Investors give up on the strategy too easily. Most investors do not understand that investing should be long-term and end up giving up on their plan. As Paul Samuelson once said:
It is common for investors to easily become bored while watching their paintings dry. Changing direction and plan is frequent among most investors. Not only that but they overtrade, and end up paying more commissions. This focus on the short-term leads nowhere and only worsens results. If you own a stock worth $100 today and that will be worth $500 in 10 years, there is no need to trade in and out of the stock. Just stick with it.
Define asset allocation and diversification
Although not always clear, there is a big difference when it comes to asset allocation and diversification. When you construct a personal portfolio, you should always consider both. In a way that they work together to have an optimal performance. Diversification can be related to both assets and asset classes. By owning stocks, bonds and commodities, you have a wide asset allocation. And diversified assets. By owning stocks in various sectors, you can diversify your stock holdings. Portfolios can be constructed in such a way that allows multiple holdings to be negatively correlated. This way your portfolio can be hedged against any unexpected move either way.
Put emotions on the side
Do not get emotionally attached to any asset. Long term mentality is important, but you also need to book some profits. Sometimes investors do not take any profits and that can also lead to poor performance. An unwillingness to pay taxes can also prevent investors from booking profits. Trimming some positions can be a very viable option.
- Information overload
In our fast interconnected world, we all get instant news. This overflow of tons of information everyday can affect our ability to analyze things. Think about how much news on different companies, stock picks and stock advice can you absorb in one day? Given the constant update on information we receive daily, investors can easily be confused. This leads them to become unsure and indecisive. This is never a good sign for the investor and its portfolio. Unable to distinguish between information, research material, opinionated material and sales pitches. As an investor you can easily feel lost. It is important to focus on your individual strategy. Avoid getting caught up in all the news.
- Make your own decisions
As humans we can be very cunning about things. It is also in our human nature to look for easier alternatives when things are tough. Investors or traders looking for trading signals or short cuts to the markets, will most of the time fail miserably. This notion that you can achieve success in the markets, with very little effort is ludicrous. And yet many young people, today look up at the influential social media traders. Craving their trading signals so they can also become millionaires. In life we make our own decisions. The same happens in the markets. Your investment decisions should always be analyzed and well considered. By making our own decisions instead of taking advice or “signals” from others we empower ourselves. It also allows us to deal with our own mistakes. If we trade or invest based on others opinions, we can easily blame them if things don’t go as planned.
- Avoid the hottest stock in the hottest sector
The market is expensive and will remain so for some time. There are plenty of hot stocks in different sectors that are way overpriced. Investors oftentimes let their emotions control them. And drive stock prices into the air. Not only that but it is common for some speculators to follow trends and profit from them. By buying the most popular securities, investors can often misinterpret the cyclical nature of some markets and some assets.
- Focus on the long-term
When investing we should have a strong long-term focus. But in our fast paced world, most people are focused on what is happening now. Investors should understand that to obtain big results in the short-term is both difficult and risky. As we have seen risk and return are completely related. To achieve high returns in a short amount of time, is only possible if you have a higher degree of risk. To avoid any of these mistakes you should focus on your strategy. Also make decisions based on your risk appetite. Not letting emotions influence your decision making process, is the key to being successful.
Don’t make the same mistake twice
I should stress the importance of learning from our mistakes. It is our duty in different aspects of life to look deeply at our actions. Understand thoroughly what went wrong. Only that way will you be able to make better decisions in the future. Allowing you to avoid making the same mistake twice. We tend to make decisions based on the present. Oftentimes we look back in our past, and try to see how easy it would have been to take the other route. But the reality is that we make the decisions based on the information we have in the present. Although those decisions will impact our future.
There are numerous problems investors face. We have seen that it is key to remain focused on your plan, and goals. That you should not incur in emotional driven decisions that might end up being self-destructive. Investors cannot be shortsighted and should focus instead on looking at the big picture. When making any investment decision we should strive to make the best decision we can.
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