7 common investment mistakes that compromises the effectiveness of your portfolio
When people think of investments, they might picture streams of passive income, making money by the beach, and all the luxuries that come with the good life (without that pesky need to have to work).
While that may be the ultimate goal, beware! There are many pitfalls that investors (especially the new ones) can encounter.
Your investment journey is probably not going to be as effortless (or as seamless) as you imagine. Expect to run into a myriad of variables, obstacles and learning curves before even coming close to excelling at this long-term endeavour.
Here are some common investment mistakes and how you could possibly safeguard your portfolio.
#1 You can't control your emotions
According to Warren Buffet, not being able to manage your own emotions is a notorious investment flaw. Investing is an art as well as a science, and can often require calm, composed and meticulously calculated decisions that are free of fear or anxiety.
Emotional decisions can lead to disastrous consequences, and destroy your portfolio in the blink of an eye. Unfortunately, emotion management is easier said than done. It's such an integral part of us. Emotional stability can be extremely difficult to attain especially during times of market fluctuation.
When it comes to investing, don't panic. Instead of your emotions, pay attention to numbers coupled with clear thinking. Make good investment decisions and practice, practice, practice.
#2 You suffer from a lack of patience
You’re probably going to find that proper investing requires a huge amount of patience. The rookie investor might often make rash decisions without thinking things through properly.
It can be a huge learning curve. So, it may take time to develop patience. Once you have reinforced your ability to hold on to your hunches and excitement, you should be better at making the right investment moves.
Plenty of investments will probably require time to turn around and become top performers. Impatient investors who don’t have the grit to stick to their guns might pull out while the patient investors reap all the rewards.
#3 You rely too heavily on past patterns
Be careful not to peg all your hopes and dreams on the past returns of a certain investment. Instead, consider basing your decisions on hard times.
For example, the purchasing of mutual funds should first involve the evaluation of the manager and how he or she performed during bad stints in the market.
If you study a mutual fund's performance during bad years and find that they lose significantly less than similar funds, you might have an indication of strong risk management efforts. This can be a very valuable aspect to consider.
#4 You listen too much to others
If a friend starts recommending a particular investment scheme, be careful not to be coaxed through peer pressure and fancy promises. Casual conversations can emerge about a great mutual fund that did really well in the past (even better than your own funds now).
The question you should be asking is; "Will that performance be repeated in the future?"
As mentioned before, basing decisions solely on past returns can increase your risk of losing.
Do your own research, and if you have to, listen to real mentors that provide sufficient evidence to back their claims.
#5 You try to time the market
To an inexperienced investor, this may seem like a fantastic idea. However, there’s just no way for you to do this. There is no magic formula to any market problem that might pop up.
Instead of trying to figure out when the best times to buy into the market are, try the dollar-cost averaging method (which involves allocating a steady percentage of your income to new investment opportunities). This is a much safer way to enter the market.
#6 You reach into retirement accounts
Sometimes, there can be a strong temptation to utilise whatever capital you have. Plenty of people use retirement accounts as savings accounts in order to make investment decisions that seem promising.
Don’t forget about having emergency funds at your disposal. Dipping into your retirement pots can be devastating in your later years.
Instead, become a regular saver outside of your retirement plan or find a financial advisor to help guide you towards better investment practices that don't involve compromising your retirement.
#7 You allocate your investments poorly
Building a portfolio isn't necessarily as easy as diversifying into multiple investment streams. It's important that you consider maintaining a balanced investment portfolio that caters to both your age and how much risk you can tolerate.
Some investors might invest too heavily in fixed income assets that don't match inflation rates.
Instead, consider having a good mix of different types of investments. Use safe assets to anchor your money.
Investing can be a crucial part of wealth building. However, investing can come with its own set of challenges. Consider these tips and stay safe. Prepare for the tough times and don’t underestimate market fluctuations. Think about the long-term safety of your portfolio. A good financial advisor can help you get your investments in order. Contact me and let’s discuss.