Despite our best efforts, mistakes happen. When it comes to investments, making mistakes can cost hundreds or even thousands of dollars.
That’s why we’ve compiled these 8 investment blunders to avoid. We’ve also sourced practical solutions you can implement in your strategy. Keep reading to stay abreast of current and effective strategies in investment management, and protect your assets from these common mistakes.
Here are 8 investment mistakes and 8 solutions to avoid them.
Mistake #1: Impatience
An impatient approach to investing is problematic. Keep your expectations in check with realistic long-term goals.
If you’ve strategized for growth along a 5-year course, don’t drastically alter your plans along the way in an effort to accelerate the process. Stay the course, have the fortitude to hold your positions long-term and reap the benefits of being a patient investor.
Portfolios are designed to grow over time. So it makes sense that more time equates to more success. Investments are inherently long-term instruments, so stressing over them in the short term only creates opportunities for behavioral risk.
Mistake #2: Not Understanding the Investment
Without a complete understanding of your investments, you’re more likely to make mistakes.
Understand the business models of individual companies before you purchase stock in them. Be sure that these business models make sense to you as a long-term investment.
If investing in individual stocks isn’t your preference, understand your other options.
Mutual funds are open-ended investment pools that amass money from many different investors to purchase securities. Exchange-traded funds (ETFs) are like mutual funds, except they are traded throughout the day.
While these are a few suggestions to help you along the way, be sure to do further research on your own to ensure you thoroughly understand your investment.
Mistake #3: Too Much Turnover
High turnover can stunt your investment’s growth. Stay the course on your investments-that means don’t switch around your positions unnecessarily. Dodge transaction costs and get those long-term gains instead by sticking with your investments for a long period of time.
Missing out on the long-term gains of a good investment choice is a costly mistake. Turnover can be indicative of impatience, market anxiety or active trading in bonds. So, unless your portfolio is full of actively traded bonds, stay the course.
Mistake #4: Falling in Love with a Company
Loving a company, the work they do or the brand they’ve created doesn’t benefit the investor.
Put the integrity of your portfolio before any emotional ties to a company that you may have developed over time. If the company is changing in fundamental ways; if you see your long-term expectations becoming uncertainties; if the elements that prompted you to buy are no longer a factor, consider selling.
Mistake #5: Letting Your Emotions Rule
Emotionally charged investment choices are frequently mistakes. Make only rational and numbers-based decisions, and divest your emotions from your portfolio. Focus on the bigger picture instead of letting fear or greed sway you from your plans.
Returns can deviate wildly over a short period of time–that’s completely normal. Keep in mind that it’s also totally normal for large-cap stocks to return an average of 10 percent over the long term, based on historical data. Your portfolio is likely to stay in line with these averages.
Mistake #6: Failing to Diversify
A uniform, homogenous, not-diverse portfolio is at the mercy of a small sector of the market. If that sector were to fail, while others thrive, the undiversified investor is left out of all those potential gains.
Common investors should stick to the principle of diversification. Allocate exposure to all major places in an ETF or mutual fund-focused portfolio. Allocate to all major sectors of business in an individual stock portfolio. Avoid allocating more than 5 to 10 percent on any one investment.
As the old adage goes, don’t put all your eggs in one basket. This is especially true of an investment portfolio. Diversification can help you manage risks and reduce the volatility of an asset’s price movements.
Mistake #7: Attempting Market Timing
Successfully timing the market is extremely difficult, even for institutional investors. Put your portfolio on autopilot instead. Making thoughtful allocations and waiting patiently is the way to do this. Your portfolio will perform on its own over time with the right allocations.
Further: timing isn’t nearly as important as asset allocation, as evidenced by history and market studies.
Mistake #8: Waiting to Get Even
Waiting for a failing stock to return to cost-basis is a cognitive error–holding onto failing stocks and waiting to “get even” costs you more in opportunity cost. Sell losing investments sooner rather than later and invest your buying power elsewhere.
Critically evaluate your investments to determine which stocks are particularly volatile and which are losers. This will help you determine which stocks to sell and when.
Investment Mistakes Recap
Here’s a quick synopsis of the tips we’ve covered above:
- Set realistic long-term goals and practice patience.
- Research your choices before investing.
- Stay the course on your investments: avoid switching around your allocations and a high turnover.
- Make rational, numbers-based decisions only.
- Invest your money, not your emotions.
- Diversify your allocations.
- Put your portfolio on autopilot–don’t try to time the market.
- Sell off your underperforming stocks- don’t wait to get even.
These tips are part of a common-sense strategy–they aim to help you avoid some of the most common errors in investment management.
For a more in-depth, analytical, or intensive strategy, we recommend sourcing a professional investment advisor. Until then, bookmark this page for general advice along your investment journey.
