The following is a sponsored 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.
6 thoughts on “5 Seemingly Harmless But Deadly Mistakes Investors Must Avoid”
Yep, those are very big pitfalls to avoid. Especially the momentum point. So many people invest more when the market is up, to then sell when it’s going down, to then buy again when it’s up… they effectively wind up buying high and selling low. 😐
Brad – MaximizeYourMoney.com recently posted…5 Reasons Your Investments Are Performing Below Average
It’s the feel good mentality I guess. We all fall victim to that phenomena of buying when things are high than low to some extent. It’s always difficult to buy a stock when there’s blood in the streets but often those are the best times to buy a stock or any asset class really. Thank you for stopping by and commenting.
I agree with all points listed, including following the herd mentality. To avoid this, I dollar cost average into the stock market and so that way I care little about the price fluctuations of the stock. I just make sure that I invest into strong companies that pay dividends that will be around for a while and where I’m reasonably diversified. That’s just one approach to avoid the many pitfalls cited.
Dividend Portfolio recently posted…How I Tackle Debt
I’m with you. I dollar cost average into all my positions and reinvest all dividends automatically. This takes a lot of the guesswork out of the equation and I’m constantly growing my positions albeit at times when prices are cheaper and sometimes when prices are more expensive but the bottom line is that I’m accumulating shares always. Thank you for sharing your thoughts.
Great points! I especially agree about avoiding the herd mentality and the importance of having an investment plan. I wrote about my own worst investments mistakes in a recent posts – some of them were a direct result of not having a proper investment plan. Although I had the right mindset in wanting to be a long-term value investor, I didn’t have an exact goal in mind of what I wanted to do. Since then, I’ve become more focussed on dividend investing and have a more specific investment plan in place. Thanks for sharing!
Graham @ Reverse The Crush recently posted…My worst investing mistakes, EVER
A plan is key for anything you want to do, especially in the long term. Since I became focused on dividend investing that’s all I concentrate on. My plan/goal is to continually build up my passive income stream first and everything else, like capital appreciation is secondary. Thank you for sharing some of your personal mistakes with investing. As always, I appreciate your comment.