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 more risk than necessary, and result in poor investment returns over time. When creating your strategy:
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 you determine what type of investment strategy to design, and avoid exposing your savings to unnecessary risk.Diversify.
The way that you spread your assets across and within different types of investments is arguably the most important part of your strategy, and will determine a large percentage of your investment return (or loss).Stay put.
Investors may have a great investment strategy, but in times of market volatility, emotions and fear can cause them to abandon their plan, sell their investments, or chase after better returns. Our best advice is to know your risk tolerance level and stick with your strategy when the market is doing poorly.
2) Chasing investment returns
The investing public is notorious for chasing after yesterday’s positive return, which is akin to driving forward while looking in the rearview mirror. If you own a diversified portfolio, there will always be a better performing asset-class or investment out there. Though chasing after higher returns is very tempting, most often, this pursuit will lead to poor 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 kind of portfolio returns you can expect on average. An efficient portfolio maximizes the return relative to the risk. Many investors falsely believe that their portfolios are efficiently diversified simply because they own several different investments, which can result in a higher level of risk and volatility than is necessary to achieve the expected return.
4) Emotional decision-making
This is a big one. Throughout history and countless market cycles, investors have been subject to human nature—greed and fear have always played major roles in the way that markets behave and how we respond to them. Understanding our emotions and how we’re influenced by them helps us calibrate better investment strategies. Having a plan, diversifying, and creating an efficient portfolio can help ensure that the risk you take on in your portfolio supports your goals, while offering protection from situations where emotions begin to steer the ship.
5) Paying close attention to financial media
Financial media outlets, like CNBC, exist to make money through advertising, and they thrive on sensationalism. More excitement means more viewers, and more viewers means more revenue. Though these networks report some useful market-related news, the vast majority of the content and commentary is, to put it simply, just noise. Consuming information from these sources decreases the likelihood that you’ll stick with your investment strategy, and in times of volatility, you may feel encouraged to make emotional decisions that interfere with the success of your investments.
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.
