Investing isn’t a piece of cake. It takes discipline and effort. However, mistakes do happen. If you know what these mistakes are, you have a bigger chance of avoiding them and becoming a better investor.
Forgetting (or choosing not to) Diversify Your Portfolio
Betting all your money in one asset class is not really a move that beats the market. If the sector or industry you’re betting on is performing robustly, then you can rake in profits. But if that sector or industry falls and crumbles, so will your entire investment.
Rather than doing that, you should always aim to diversify your holdings across a number of different assets that are not too correlated with each other. The concept of diversification aims to protect the investor in the event that the market takes a hit in a certain sector or a certain market cap.
Not being Familiar with Your Investment
It is of extreme importance for you to understand what asset you are buying. In fact, understanding the ropes of how a company and its business model work together can be extremely beneficial.
For one, you will know what to expect from the stock or the fund. If you are a fan of the sector, you will easily get pass through the press releases and understand what the companies are really saying about the business.
You will also be able to talk about your portfolio with confidence. People sometimes buy investments because a friend or a family member said it was a hot pick. However, it is ultimately your decision and your money that is going to be spent.
Having the capability to discuss your portfolio and your investments will not only make you sound confident of your investment, it will also make you more aware of what you’re getting yourself into.
Timing the Market
Timing the market or day trading is appealing to many investors because of the high rate of returns. It’s also been promoted as something like a get-rich-fast method of investing. However, in reality, this is not the case.
Day trading or tying to time the market is highly risky and usually ends with a loss of principal and even more.
Rather than trying to time the market, it’s better to try to slowly add to your portfolio and use dollar-cost averaging over time in order to let your money grow.
True: successful active managers exist. However, risking your retirement to try to make extra money is not really worth it. Search for funds that are fit for your investing goals and use them to create an investing strategy that satisfies your needs and let the overall market to build your wealth over time.
Not Considering Risks Thoroughly
Investing can easily be an exciting activity for you that you want to get more and more—and then you forget to secure yourself from the possible risks present in the market.
There are a lot of investors who focus on the upside potential of their investments, so much so that they forget to also consider the downside potential of their investments.
If you are investing for the longer term, there will inevitably be a time when you will lose money. You must therefore focus on finding a way to minimize the risks and protect your portfolio.