The following is a guest blog post:
Investing can be an interesting ride when you are making money and it could be a gut-wrenching ride when you are losing money. All investors will experience a mix of exhilarating highs and heart-breaking lows in their investment journeys – the key to profitability is to have more gains than losses. Many investors often record losses because they are unable to get the right mix of assets, investment strategies, and risk management solutions. However, one of the smartest ways to start making the right investment decisions is to know how to spot the wrong decisions. This piece looks at 5 seemingly harmless but deadly mistakes that investors must avoid to succeed in the markets.
1. Not having an investment plan
Telling investors to create an investment plan/strategy sounds cliché but it is surprising that many investors are yet to understand the importance of having a plan before they enter the market. An investment plan is simply a document in which you lay out how you plan to save up money, invest, manage risk, handle losses/profits, and keep your head when the other investors are scrambling about like headless chicken. Jeremy Roberts, an analyst at ECN Capital notes that “without an investment plan, you’ll most likely be reacting to market news and moving around in circles based on the prevailing sentiment in the market.” Even an imperfect plan will stand you in good stead than bumbling through the markets without a plan.
2. Underestimating the power of asset allocation
Many investors do a commendable work in devoting time and resources into choosing the assets to put in their portfolio. However, choosing the right individual securities is only half the battle, the other half is allocating assets to your portfolio to have the right diversification mix. If you don’t diversify your portfolio properly, you’ll be amplifying your risks on the downside. Smart asset allocation takes your risk appetite and other factors such as time constrain into consideration in order to have the right mix of conservative and speculative investments.
3. Chasing momentum
Many investors mistake investing for gambling and they find it hard to sit tight and do nothing when other investors are raking in the big bucks on other individual stocks. However, you are likely to end up with more losses than gains if you base your investment decisions on the past market performance of specific stocks or assets. If you have missed the boat on any hot stock or trend, you should learn to sit tight because the next wave is just around the corner.
4. Not expecting reasonable returns
The fastest way to double your money is to fold it into two and put it back in your pocket. If you think that investing on Wall Street is a get-rich quick scheme, you’ll be in for a very rude shocker. You need to have realistic expectations on the returns that your portfolio will deliver—having realistic expectations will help you make investment decisions with your head and not your emotions. Low-risk investments typically attract low returns and investments with high-returns tend to attract a proportionate amount of risk.
5. Following the herd mentality
The legendary Warren Buffet once advised being greedy when others are fearful and being fearful when others are greedy. The smartest investment move is to study the markets deeply and long enough to formulate an investment strategy for the long term and then stick to your strategy irrespective of momentary blips on your screen. Many investors lack confidence in their ability to make sound investment decisions and they often jump in and out of positions based on the prevailing market sentiment. Granted, you should tweak your portfolio regularly to accommodate changes in the market; however, you need to ensure that YOU have a valid reason for tweaking your portfolio instead of following the crowd.