There is plenty of research out there readily available in today’s world. This has led more people to attempt managing their own money. There are many things you need to account for if you decide to tackle financial planning on your own. One of the main areas is investment management. If you want to give yourself a shot at successful investing, try and avoid these 10 common investing mistakes.
1. Follow what everyone else is doing. Remember when you were a kid and your parents said “If (insert local bad kid’s name) jumped off a bridge, would you?” This is kind of like that, only the adult version. Investors tend to do what everyone else is doing and are overly optimistic when the market goes up and overly pessimistic when the market goes down. It’s important to keep a cool head and invest objectively. Do not let FOMO affect your investing.
2. Allocate too much into one stock. If you had invested your money today’s popular tech stocks fifteen years ago, your portfolio may be good right now. Hindsight can be detrimental to your psyche when investing. Remember there are other names though that you wouldn’t have wanted. Imagine you invested in Enron, WorldCom, or Lehman Brothers? All were high flyers at one point, yet all have since filed for bankruptcy. So, the key is to make sure you don’t put too high of a percentage in one specific stock.
3. Buy when the market is up. A basic principle of investing is to buy low and sell high, even though most investors do the opposite. A big reason why this happens is emotion. We see something going up and we want to be a part of it. Make sure to have a strategy when investing and that you are not following the latest investment craze or fad. Side note, the market is one of the only places where prices up and that inherently makes people want to buy. Imagine if a car you were looking at went up 20%, highly unlikely you’d want to purchase it at the higher price.
4. Sell when the market is down. The temptation to sell is always highest when the market drops the furthest. If your portfolio goes down 10% in a month the first thought is “Nine more months and I’ll have no money.” Obviously, that is an irrational fear but it’s what many inexperienced investors tend to think. They then sell, locking in losses and precluding future recoveries. Think about your home, if I told you the price of your house went down 30% would you rush to sell it?
5. Keeping money on sideline until the market “calms down.” Since markets almost never “calm down,” this is the perfect rationale to never get in. In today’s world, that may mean running the risk of not keeping pace with inflation. Don’t fall victim to “waiting for the perfect time” because it doesn’t exist.
6. Buying because of a “hot tip” someone told you. There are plenty of professionals out there, don’t take advice from a guy you play volleyball with who has some great tips, even though his day to day is director of HR for a textile company.
7. Solely listen to the talking heads on TV. First thing to remember is they are on TV for a reason. There are many “experts” out there crowding the airwaves, especially in our 24-hour news coverage era. How do you know which advice should you follow? That’s why if you are choosing to go at investing alone you need to constantly educate yourself.
8. Going with your gut. When it comes to hunches, irrationality rules. Utilizing fundamental research and technical analysis will help you to have conviction on what you are buying and selling.
9. Let market volatility dictate your actions. Responding to the market’s daily ups and downs gives you the potential to lock in losses. Even professional traders sometimes miss on predicting the market’s bigger shifts, let alone daily fluctuations. When you react hastily to a volatile market it can be a recipe for disaster.
10. Set it and forget it. If number 9 is one extreme, number 10 is the other extreme. While you don’t was to drive yourself nuts every day staring at your portfolio you also don’t want to ignore it. Ignoring your portfolio until you’re ready to take money can really mess with your asset allocation. It’s important to make sure your investment mix is in line with your risk tolerance and time horizon. If you never look at your portfolio, how do you know your asset mix is still in line with your goals?
If you feel like you have made some of these mistakes give us a call to discuss how you can alleviate them.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects or protects against loss.