Most Common Investment Mistakes to Avoid
Sometimes, learning and understanding something is easier when experienced or learned through making mistakes. Every person makes a mistake occasionally, and the only thing you can do is to learn from your and other people’s mistakes and to avoid what others did in their pasts. Although experience helps you improve in life, when it comes to investments, this is not the case, as this leads to your investments, both financial and emotional, to go to waste.
Investing is one of the best decisions for your finances. Below are some of the common mistakes investors make and some tips on how you can overcome them to have the best out of your investments.
Sleeping Too Long or Jumping Too Early
There are two common reasons why investors never make it big in the first place.
First is those who keep sleeping on an opportunity in investing or those who delay deciding on investing. These are people who read all the books, researched how to invest and maintain it, and watched all the investment videos available on various platforms yet were unable to act when the opportunity to invest arrived. Some call this “paralysis by analysis.”
Second is those who jumped in too early on the game of investment. These are the people who did not research, understand, and prepare themselves for investing yet bought the first scheme sold to them. They have the goal of becoming rich in a small amount of time and decide to call it quits when their investment fails.
How investments work and how to make it work for you takes time. It is simply not enough to read books, attend seminars, or to invest in a whim. Here are steps to help you start:
- Check your finances first: It is important to know how much you can use for investments while having enough for your daily expenses and for your savings. First, pay off any outstanding debts you have and establish an emergency fund large enough to cover at least three to six months of your daily expenses. Investing is one of the best ways to improve your finances, but take note that you cannot get rich overnight.
- Do not invest using borrowed money: In case you lose your investments, you will have to repay the principal amount, as well as the interest. Instead of gaining financial freedom, you will just get yourself into more financial troubles.
- Set your goals: Know your purpose for investment because, once these are established – retirement, education, or home, for example – you can figure out how to manage your finances and your investments.
- Understand investment options: Many investment schemes can easily carry you away, so it is important to understand your options through research and seminars, or consider hiring a good financial adviser or planner. Carefully consider the costs and the returns before choosing.
Making Unplanned Investments
Investments are just like traveling – you will need a map. Through researching and planning, you will be able to determine your financial goals and see whether it is realistic, look at where you want to be in the future, identify the risks, and build a plan to get there.
Before investing, plan on what you want to invest in and how you are going to manage it. Do you want individual stocks? High cost or niche index funds? Mutual bonds? If you have a plan, it will be easier for you to grow your wealth surely and safely.
Not Understanding Your Investment
Being too cautious does not hurt anybody. Warren Buffet, one of the world’s most successful investors, cautions investors not to buy stocks in companies with business models they do not understand. The best way is to fully understand each company represented by individual stocks or through building a diverse portfolio of mutual funds or exchange-traded funds (ETFs).
This also involves investigating before investing. Know what you are buying, the returns you can get, the risks it involves, and the motives of the seller to negotiate a good price. In short, understand your investment before diving into it.
Failing to Diversify
Another common mistake made in investing is failing to diversify. Often investors focus too much on one large investment sector or security thinking that this will give maximum return (the conservative type). This can only lead to two things: maximum returns if the market increases; or losing all of your investment if the market moves against your position. On the other hand, too much diversification can affect the total performance of your investment.
Some investors prefer several index funds, while others are satisfied with one-fund portfolios. The secret to diversifying properly is to find the balance between having enough diversification and exposure. You can do so by seeking advice from a professional.
Picking the Wrong People
With so many competitors in the world of investing, the true intentions of a person could easily be hidden. You will never know who to trust your money to. “Birds of the same feather flock together,” as the saying goes. From financial advisers, partners, and brokers, it is important to have people around you with the same mindset and goals to motivate, advise, and keep your investments growing. This can greatly aid you in making decisions, as what they will advise is surely the truth (not false rumors and speculations) and the best for your investment. It is better to spend more time to find the “gems” to keep than to settle with “decorative stones” only.
Being Too Attached and Emotional
For example, a close friend of yours made it big on his investment in a short amount of time and invited you to invest in the same sector. Remember that just because a friend recommended doesn’t means it is a good choice for you as well. There is no guarantee if that particular investment will have the same performance in the coming months.
In investments, you lose if you allow your emotions to rule. Fear and greed usually take major roles in impeding decisions, whether buying or selling. Being too greedy can push you to buy out of a whim or to follow the latest craze. Being too fearful, on the other hand, might lead to selling at a low price just because of losses in the same sector. It is then prudent to think wisely, focus on your goals, and use other investor’s behavior as an advantage. With the help of financial advisers, you can easily create a specific strategy and be encouraged to stick to it.
Speaking of greed, this is another thing to keep in mind in investing. One of the fundamental principles is to buy low and sell high. In this contemporary world, the law of supply and demand greatly affects investments. Prices go higher, and investors buy high to get on with the craze to maximize their returns. These rash decisions can be problematic when the time comes.
It is then best to invest slowly but surely. Investments may take a long time before gaining significant returns or profits. This still depends on how the investors manage and maintain their accounts. This may lead to another common mistake committed by many – being impatient. Many sell too early, usually right after seeing their stock made a profit for fear that they may lose what they had gained. It is good to take the risk sometimes.
On the other hand, if there are impatient ones in the world of investments, there are also those who wait for too long. This is another way to lose your investments. For example, a fellow investor spent his money on an investment he thought would be worth his cash. Instead of gaining value, it is now down 30 percent. With the hope of his investment getting back its value, he holds on to it and waits for it to regain its value. That is when he plans to sell it.
If and when the value of the investments comes back, they may still not sell in the hopes that it will continue to rise and prove their earlier judgment that it is a good investment. This is called “cognitive error” – the failure to realize losses – in behavioral finances. People often tend to forget that investments are investments once they come to love the company, for example. Remember the reasons you have when you invested. When these reasons change, consider selling your stocks. It is better to cut the losses off while your investment has not lost that much value yet and utilize it for other investment opportunities.
Never Evaluating Investments
Lots of investors do not take time to evaluate their investments and transactions. This is quite frustrating since this evaluation can lead to the discovery of valuable discoveries and help guide you in your investment journey. Most talk about success, but it will not hurt to talk about losses occasionally.
Also, in evaluating your investments, you can determine and recheck your progress based on your plan of action. As your wealth grows, you may want to consider investing more in a different sector. Alter your strategy depending on the progress you have made in reaching your financial goals.
Do not get this wrong, though. This cannot help you with timing and predicting the market’s performance and behavior. Even professional advisers and investors fail to do this successfully. Your past mistakes and the mistakes of others can only help in developing a plan of action and serve as signs if the market is changing.
Success in Investing
Making mistakes is part of the investment process and will help you learn how to manage and grow your finances. Aside from the common mistakes listed above, there are more that you will encounter as you invest. You do not have to learn all of these from personal experience, as this may cause you lots of losses. Learn instead from the mistakes of others and listen to people you trust that share the same vision as yours.
In order to prevent losing your investment and committing mistakes, it is then important to know when you are committing them, how to avoid them, and how to solve them. Remember, first to do your research, learn and understand your investments, avoid becoming overcome with emotion, and find the balance between taking risks and learning when to let go of your investments. Avoid the above mentioned common mistakes, and you will surely be on your way to having happy returns from your investments.