The Five Common Mistakes That Hurt Investors
Not Having a Plan
Investing is not just about money and finance, it is also about our lives in the future. And just like with anything else in life, the more planning we do, the greater our chances are of success. Building an investment portfolio without having a clear direction of what we are trying to accomplish is like attempting to construct a house with no blueprint. Before we begin buying stocks, mutual funds, and other investment vehicles, it is prudent to take some time to figure out exactly what our goal is.
Each goal and objective an investor has may require a different path and approach to help achieve that goal. For example, saving for retirement, funding a child’s college education, and savings for a large purchase like a home each may require a different strategy. Consider how much risk you are willing to take and your comfort level with taking risk. Time horizon is also a big factor, and someone who is planning to retire in five to ten years should generally be more conservative than someone who is in their twenties or thirties.
You should also give some thought to what assets you will be investing in and how your choice of what to invest in will impact your ability to meet a goal. Within your portfolio, you should consider how much diversity you have, not just between asset classes (stocks, bonds, etc.) but also within each asset class (growth vs value, short-term vs long-term debt, etc.). Writing down your plan and mapping it out will give you a way to gauge if you are on track and how well you are meeting your objectives. To emphasize the importance of planning, we look to what Benjamin Franklin said: “If you fail to plan, you are planning to fail.”
Set It and Forget It
If you are not actively managing your investments, you may be doing some serious harm to your long term profitability and returns. Being active doesn’t necessarily mean you must constantly monitor your portfolio on a daily basis, in fact I would advise against that. Active management can be as simple as routinely rebalancing your portfolio so that it reflects your goals, risk tolerance and asset allocation. Whether you pick individual stocks, invest in mutual funds, or index fund ETF products, the most important thing to keep in mind is that you periodically evaluate your performance, risk, and make changes when they are appropriate. Try playing offense with your investments instead of defense.
Following The Crowd
What works well for one investor won’t necessarily pan out for another investor. A perfect example is when financial news outlets lay out investment advice for a broad audience. Every day, financial news outlets spout out investment advice for a broad audience, but this does not mean it is guaranteed to work for you or fit into your financial plan. The same goes for advice from friends and family. You might hear a hot stock tip, or a mutual fund or ETF that comes highly recommended. It is paramount that you do your own research and make investment decisions based on your findings alone.
Patience Is a Virtue
It doesn’t matter if you are investing a little or a lot, everyone wants their investments to perform well. No one buys an investment with the expectation or hope that they lose money or that they will eventually take a loss. Creating a long-term strategy and plan and sticking to it is your best bet to generate positive returns. When you are constantly shifting your money and assets around to chase returns, you are not giving your investments a chance to show what they are able to do. I am often reminded of the adage by Darcy Howe, a VP with Merrill Lynch: “I’ve always felt that investing is like a bar of soap. The more you handle it, the smaller it gets.”
Keeping this in mind, the same rings true if you make investment decisions based on recent performance. Remember the overplayed, but true, disclosure “past performance is no guarantee of future results.” Just because an investment or asset has performed well over the last few quarters or years does not mean it will continue into the future. Methodology is more important than a recent scorecard.
To be a successful investor, exercise your common sense. Recognizing potential missteps and pitfalls can make all the difference in how and why your investment strategy is successful or not.
Letting Emotions Take Control
Decision making based on emotions can have disastrous consequences, and this rings true when it involves investments and your finances. Making an investment purchase based on a feeling or intuition without doing any research or homework can leave you with a partial or complete loss, depending on the severity. When contemplating whether to invest in a particular asset or investment vehicle, you must look at the big picture, complete some due diligence, and determine if your instinct is leading you in right direction.
On the other hand, it’s also extremely important to recognize when your emotions are beginning to dictate whether or not to sell an investment that did not pan out as expected. If you are holding an investment that you have taken a large loss on, or that continues to lose money, it can be tempting to hold on with the hope that it will recover and you might regain your loss. If you are holding on to a losing position with the fear of taking the loss or being wrong, the opportunity cost of not letting go can sometimes be as large as the loss on paper.
As you can see, there are many factors you should consider when you are putting new money to work for your future, or evaluating your current investments and looking for improvement. The important thing to remember is you’re not alone in planning for your future. In addition to the numerous educational resources available to you, guidance from an experienced wealth advisor can help ensure that your investment strategy and allocation is appropriate for your risk tolerance, time horizon, and overall long-term financial goals. For more information about investing, behavioral finance, or just to chat about financial planning, send me an email at [email protected]