Common Deadly Mistakes by Investors
Beginners’ are often left paralyzed by the choices and suggestions they encounter when they dip their toes into the world of investment. It is easy to get lost in the jargon and the numbers. While there are many people out there who are ready to offer some anecdotal counsel, it is always safer and wiser to revert to advice from experts who have studied the market.
We have compiled a list of common deadly mistakes by investors that you can use as a troubleshooting checklist or a crash course in investment tips.
1. Do your research: We cannot stress it enough. Once you have your financial goal figured out, the next step is to spend time learning about the various asset classes. It would be best if you also learn how investing works for each asset class to know your options. Think of it as investor education so that you can make informed choices. You cannot rely on sheer luck or anecdotal investment advice to make your decisions. This is the mistake many novices make, resulting in grave errors and heavy losses.
2. Learn about asset allocation: There are different classes of assets you can invest in. Traditional investment categories include stocks, bonds, and cash. There are multiple classes of assets that are deemed alternative investments. Alternative investment options are not new to the investment scene. Still, they are considered so because they tend to behave differently from traditional asset classes when the market shifts. Alternative investments include private debt, private equity, real estate, hedge funds, collectables, and commodities (e.g., oil, natural gas, etc).
Prudent asset allocation in your portfolio is key to achieving your investment goals. This is because asset allocation is a strategy that aims to balance the risks and the rewards in your investment portfolio by diversifying your investments horizontally across various asset classes. You can then decide how you want to dispense your money across multiple categories based on your risk profile. For example, if your risk tolerance is higher, you might allocate a large chunk of equity. On the other hand, someone with a lower risk profile might choose fixed-income instruments such as bonds. Portfolio allocation will also depend on whether you’re looking to invest in the short term or long term.
3. Diversify your portfolio: One of the most significant investment mistakes you can make is accruing investments with the same risk profile. Many investors invest in only one asset class, for example, stocks. Furthermore, even within an asset group, you can further diversify by investing in different industries. When you’re trying to diversify your portfolio, make sure that you include dissimilar or even opposing investments. This kind of variance ensures that your sources of returns do not correlate and remain independent.
The benefit of diversification is that it lowers the risk profile of your portfolio and provides the possibility of increasing risk-adjusted returns. Having a variety of independent sources of return ensures that when movement in the market negatively affects one asset class or a specific industry, the rest of your assets remain steady. Some might even result in inverse returns, i.e., generate higher rewards while certain other investments aren’t doing well.
4. Consistency: Anyone serious about investing must realize that it is a strategic practice that requires consistent and regimented implementation. If you’re looking for quick returns and making random investments, especially when the market is high, you are essentially gambling and not investing. This is one of the worst investing mistakes you can make.
If you’re looking to build wealth, the one thing you should not skip is creating a strategy based on your financial objectives. Once you have the plan in place, it is essential to be regular and disciplined in its enforcement. Be sure to periodically review the performance of your investments and update your strategy to best suit your requirements.
5. Expectations: Manage your expectations in regard to historical returns. Historically average returns rates, generally 7% to 8% (when adjusted for inflation), may not be of utmost importance to you. Historical returns don’t easily lend to predictions for how the market will move in the future. These averages are generally calculated over 30 to 40 years. The way the market has, on average, functioned throughout, say 1990 to 2020, is not how it is currently performing or will continue to do so. Furthermore, these averages may be irrelevant for you if your holding period is shorter, say around 10 to 15 years. Therefore, it is vital to manage your expectations and prepare for variance in your returns.
6. Liquidity: Another key to investment risk management is to avoid low liquidity. Liquidity refers to the ease with which you can convert your investment to cash. If there are numerous barriers, your investment is illiquid. Life and the financial market can both be equally unpredictable. You should be able to quickly liquidate your money, be it in cases of emergencies or to cut your losses. You can do that only if the investments you make are highly liquid.
7. Emotions: Do not act on your emotions. Greed and fear can be immensely motivating. But to act based on emotions rather than reviewing the market situation is one of the worst valuation mistakes you can make.
8. Patience: Patient investors have reaped immense rewards. Long-term investment portfolios have been known to provide sizable returns. It is thus essential for you to stick to your strategy and avoid making any irrational decisions because you’re getting impatient.
9. Personal Finance: You must learn to manage personal finances well. It is not helpful to invest if you don’t have the money to. The best way to do it is by implementing strict budgeting. Get your spending habits on track, and avoid credit card debts and personal loans. Think of other areas you need to invest in, for example, health insurance. Overspending on things whose value depreciates with time makes no sense. So be careful.
10. Expert advice vs. DIY: Not everyone has the capacity and resources to figure out the behemoth task that investing can be. And this is completely alright! You can always reach out to experts in the industry who can help you. Even so, you will have to develop a working knowledge of investment. Reports show that investors who work with experts have increased returns and a clear vision and peace of mind. Browse your options to find the right fit for yourself. On the flip side, if you want to do it yourself, the resources you invest in your financial education will pay lifelong dividends. Investing in yourself is never the wrong choice.
To sum it up
These are common mistakes people make when investing. It is always a plus to have a stash of investment lessons to lead you through your journey. So long as you keep these in mind, investing can be fun; after all, making money will always be a delightful process.
Don’t wait until it’s too late.
Start today and secure your future.