Identifying and Avoiding Common Investing Mistakes
Investing always involves some level of risk. Even if you make smart investments, you could wind up getting hit with significant losses. Fortunately, there are some steps that you can take to protect yourself.
A good place to start is by identifying and avoiding common investing mistakes like the ones listed below:
Not Being Able to Let an Investment Go After A Loss
A lot of investors struggle with the thought of selling at a loss. Instead, they hold on, hoping that the investment will climb back up to a point where they can at least get their initial investment back. In my opinion, this is partly due to the fact that we are conditioned to be competitive from the time we are young. The thing to remember is that investing is not a competition and you don’t have anything to prove. Take an honest look at each of your investments. If you wouldn’t buy them today, the time has probably come to sell. Even if you take a loss, you can invest the money that you make in more profitable ventures.
Failing to Sell After A Gain
A lot of times, investors also struggle to sell holdings that have appreciated in value. Typically, this stems from the fact that they are worried that the value of the investment will continue to rise after they sell the holding. While this does sometimes happen, the opposite also occurs where the value drops, and any gains are lost. In order to keep from losing what you have gained, you should consider selling at least a percentage of the holding. That way, you can make some extra money to invest in other areas. This is an effective technique to use when rebalancing your portfolio.
Failing to Come Up with An Investment Plan
You probably wouldn’t head out on a long trip without a GPS device or a map to help you find your way. The same should hold true for investing. Chances are, you probably have goals that you want to achieve with your investments. For instance, you might be building a retirement nest egg or helping to put your kids through school.
If you don’t take time to plan your financial future, you won’t have any idea how much money you need to make or what level of risk is appropriate.
You also won’t be able to tell whether or not you are making any progress toward your objectives. Making investments without a plan is a lot like driving your car around in circles without any direction in mind.
Attempting to Predict What the Market Is Going to Do
The market is unpredictable. Even during periods where it seems like it is going in a particular direction, trading always has ups and downs. It isn’t practical or advisable to try to time your buying and selling based on your predictions about what the market will do.
Being Overly Concerned With Taxes
The taxes on gains from investments that are held in accounts that are taxable are quite high. Even though it is always a good idea to try to minimize your tax liability as much as possible, I believe that it is better to get taxed on a gain rather than having to deal with a loss.
Failing to Monitor Your Portfolio
Keeping tabs on your portfolio is important. Anytime a change occurs with a particular company, you should take a look at what the stock is doing. For instance, management changes, acquisitions or mergers, the introduction of a new competitor, or large selloffs of stock by the company’s leading executives are all situations that could affect the value of the stock.
This holds true for mutual funds, too. If there are changes in the manager of the mutual fund or if the assets that are being managed suddenly drop or increase from the norm, it is a good idea to take a closer look at the fund to see if you should sell it.
Not Maintaining A Balanced Portfolio
Along with planning your investment strategy, you also need to regularly balance your portfolio. Ideally, you should have a plan in mind for the various types of investments that you want to make and the total percentage of your portfolio that each investment type will comprise. Spreading your money across a variety of different investment vehicles is always a good idea. When crafting your investment policy, come up with a maximum and minimum percentage for each type of investment. Each year, sit down and evaluate your portfolio to make sure that your investment distribution is still in line with your investment policy.
The performance of various investments can differ over time. As a result, your portfolio can become unbalanced. In order to minimize risk, you should periodically rebalance it. For instance, if you have allotted 60% of your portfolio for stocks but your stocks have grown in value and now make up 75% of your portfolio, your risk exposure is higher than your initial plan. If the value of the stocks suddenly drops, your losses will be larger than you anticipated.
Being Held Back by Excessive Fear
This century got off to a rough start in terms of investing. The market dropped significantly between 2000 and 2002. It suffered a major hit again between 2008 and 2009. Not long ago, the Brexit vote also significantly impacted the stock market, causing a sudden, steep drop. All of these events have made investors wary.
Even though this fear is understandable, if you get caught up in the idea that events that have happened recently will continue, you may be too afraid to invest in a way that helps you reach your goals. Obviously, it is important to consider recent events when planning your investment strategy. At the same time, however, you can’t allow your sense of fear to keep you from taking the required action to reach your financial goals. This advice applies to both drops in the market and to prolonged bull markets.
Focusing on Individual Investments Rather Than Building A Portfolio
If you make random investments without following a specific plan, you probably won’t achieve the success that you want. Think of it like football. Every member of the team has a specific role that they fill. Together, all of the players come together to create a winning team. The same concept should apply to your portfolio. Each investment you make should fill a role in your investment strategy, helping you put together a winning portfolio.
There are no guarantees when it comes to investing. However, you can minimize your risk and improve your chances of success by avoiding these common mistakes.