Every investor makes mistakes—even the best ones. However, what sets smart investors apart is that they don’t make the same mistake twice. Be smart and increase your chances of success by being aware of and avoiding these nine common mistakes.
1. Investing Without a Plan
This is the worst mistake you can make. If you don’t know what your goals are, it’s impossible to reach them. Decide what you would like to accomplish, whether it’s accumulating enough money for your child’s college expenses or enough money to retire by the age of 60. Simply “making more money” or “beating the market” are not goals. If you decide what you’d like to achieve, and when to achieve it by, you can come up with a sound long-term plan that will help you get through the volatility of the markets throughout the years. You can determine what risks are appropriate for your portfolio, what assets to invest in that will help you achieve your plan and how to best diversify. Having a plan may not be as fun as trying to “beat the market,” but it will likely be more profitable in the long term.
2. Basing Your Decisions on Past Performance
Ever heard the phrase “history often repeats itself”? Well, ignore it. There is no proof that this happens. In fact, if you take a look at some past performance history, it will tell you the opposite. Take growth stocks and tech stocks in the 90s, for example. They had a great track record over several years, but those high returns turned into high losses in 2000-2002. And it doesn’t just apply to stocks. Real estate prices have also seen both ends of the performance spectrum. Choosing investments based on past performance without actually knowing why they are performing well is not a smart investment strategy. Instead, choose investments with levels of risk that are appropriate for your portfolio with performance that makes sense for that particular asset class.
3. Timing the Market
While basing your decisions on the past is a bad idea, basing them on the future is, too. It may seem fun and exciting to try and time the market, but it’s almost always unsuccessful. Even the best investors can’t consistently time the market, so they usually do not try. If you bail out of a stock when prices dip, you may miss out on a sharp recovery and the dividends that are paid along the way. If you’re going to go this route, you might as well flip a coin.
4. Keeping Your Eggs in One Basket
You should never put all of your investment money into one asset or asset class. Instead, make sure that you spread your money around enough so that if one asset or asset class goes downhill, it won’t take too much of a chunk out of your entire portfolio. Make sure you diversify, and allocate your funds into a blend of equities, bonds, commodities, and other types of assets in order to benefit from their different investment cycles. That way, if one investment is doing poorly, you’ll have others that may rise that can compensate for the poorly performing investments.
5. Buying Something You Don’t Understand
Just because you see an investment perform well, doesn’t alone mean it’s a good investment. Before you blindly put your money somewhere, do some research and make sure you understand what you’re investing in. Find out the risks and rewards associate with each investment before deciding whether it’s right for you.
6. Keeping the Losers and Selling the Winners
Another common mistake among investors is holding on to losers in hopes that they’ll bounce back into the future, while selling the winners in order to lock in gains. What sometimes happens is the winning stocks go on to outperform whatever gains were earned by the losing stocks that were kept in the portfolio.
7. Basing Decisions on the Media
Basing your investment decisions on what you hear being reported in the news is a mistake you should not be making. You can take the news into consideration, but take it with a grain of salt and don’t rely on it alone to make your decisions. This will result in poorly timed investment moves, like coming in at the back end of a trend. Stick to your initial investment plan and don’t overreact to any good or bad news. Instead of following the news, spend your time creating and sticking to your investment plan.
8. Following the Crowd
In addition remaining independent from the media, you should also ignore what the crowd is doing. Too many people buy stocks when everyone else is buying, and sell them when everybody else sells. If you do this, you will end up buying at the top of the market when the stocks are more expensive, and selling at the bottom when prices are cheaper.
9. Failing to Review Your Portfolio
Even if you avoid all of these common mistakes, you still can’t just sit back and hope your investment plan pays off. You need to review your portfolio at least once a year in order to make sure it still works. Take a look at your portfolio and re-balance it to meet its target asset allocation that you came up with in your investment plan.
Stay focused on creating a solid investment plan, sticking to it and continuing to improve it. If you mess up, don’t worry. Every investor blows it every now and again. The trick is recognizing your mistakes quickly and never making them again.