5 Common Investing Mistakes
1) Investing without a plan
One of the most common mistakes made by inexperienced investors is wading into the markets without a plan. Investing without a strategy can expose you to a large amount of unnecessary risk and poor investment returns over time.
Have A Goal:
Why are you investing? Are you looking to provide income for retirement? Put your children through school? Keep up with the rate of inflation? Your goals will help determine what type of investment strategy to design and keep you from exposing your savings to more risk than is necessary to achieve your goal.
The way that you spread your assets our across different types of investments is arguably the most important part of your investment strategy and will determine a large percentage of your investment return ( or loss ). It is also important to be thoughtful about how you choose investments within each asset type.
- Stay Put:
One of the biggest mistakes investors make is that they may have a great investment strategy, but are consumed by emotions in times of market volatility, causing them to abandon their long-term strategy and sell their investments when the market is doing poorly or chase after better
2) Chasing investment returns
The investing public is notorious for chasing after yesterday’s positive return. This is similar to attempting to drive by looking in the rear-view mirror. If you own a diversified portfolio, there is always going to be some better performing asset-class or investment and chasing after that return may be very attractive, but most often this will result in poor investment returns over time.
3) Creating an inefficient portfolio
The way in which you allocate and diversify your investments will determine how much risk you take and what you can expect in the way of average portfolio returns over time. An efficient portfolio maximizes the return relative to the risk. Many investors believe that they own a diversified and efficient portfolio simply because they own several different investments. This can result in a portfolio where the level of risk is higher than it needs to be in order to achieve the expected return and can result in unnecessary risk and portfolio volatility.
4) Emotional decision-making
This is a big one. Throughout history, through countless market cycles, investors have been subject to human nature. Greed and fear have always played starring roles in the way that markets behave. Understanding these emotions and how they affect behavior can help you calibrate your investment strategy. Having a plan, being diversified, and creating an efficient portfolio can help to make sure that the risk you take in your portfolio supports your goals and keeps you from getting into a situation where your emotions begin to steer the ship.
5) Paying close attention to financial media
Financial media outlets like CNBC exist to make money through advertising revenues and they thrive on sensationalism. More excitement means more viewers, and more viewers result in more revenue. Although these networks report some useful market-related information, the vast majority of the content and commentary is noise. Consuming information from these sources certainly will not increase the likelihood that you will stick with your investment strategy, in fact, in times of volatility I would argue that they can encourage people to make emotional decisions that interfere with their success as investors.
The views expressed by the author are his own and do not necessarily reflect the opinion of Wells Fargo Advisors Financial Network or its affiliates.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. Diversification does not guarantee profit or protect against loss in declining markets.