Some people just aren’t financially savvy. Instead of calling an expert for investment advice, they try to figure it out on their own. This is never a good idea. See below for the most common investment mistakes to avoid. Learn from others’ failures and don’t fall into these traps!
1. Buy/Sell Decisions Based on Emotions
Many people get caught up in emotions when they’re making investment decisions. Never make financial decisions based on your emotions. Instead, make decisions based on logic. Come up with a solid plan and stick to it.
Remember when Trump was running for President and we were told if he won the election there would be a massive sell-off in the market? And remember what happened when he won? That’s right. The sell-off never happened. In fact, if you didn’t succumb to your emotions and sell, then over the last two years you’ve seen a return upwards of 15 percent on an annualized basis. But if you sold off, then you’d have a third less money than you would have if you didn’t sell. The lesson — make investment decisions based on logic, not on your emotions.
2. Trying to Time the Market
Sometimes people think they can time the market, meaning they buy and sell stocks based on expected price fluctuations. Take the real-life example of the president of a bank who got out of the market before the 2009 great recession. While he made the right decision to sell off before the market crashed, he never reinvested to reap the benefits of the uptrend. You may be able to time it right once, but it’s likely you’ll make a mistake in the long term. Ninety-nine percent of the time you’re going to lose money!
Oppenheimer, a large financial services company, has a commercial featuring a polar bear hanging out on the ice not doing anything. The commercial’s point is that sometimes the best investment decision is not to do anything. Other strategies include re-balancing your portfolio or investing according to your risk and time frame. But don’t try to time the market.
3. Being Too Aggressive or Too Conservative
Most people don’t have a good understanding of risk. Let’s say you want to buy a house in a year. It’s too risky to invest your down payment in the stock market now and hope it’s still there when you’re ready to buy the house. On the flip side, an example of being too conservative is a forty-year-old who has 100 percent of his/her money invested in a money market inside a 401(k). Instead, you must work with an expert and develop with a reasonable strategy for your time frames.
4. Not Having a Clear Investment Strategy
It’s important to have a clear strategy before investing your money in the market. Your investment strategy should consider your goals, resources, and time frames. Additionally, when you’re setting up your asset allocation, take something simple like the ratio of stocks to bonds, remain consistent and stay with the ratio. Don’t start fluctuating because you think the market is going take a turn. Instead, start with a solid asset allocation strategy based on upon good, fundamental considerations such as resources, time frames, and your personal risk tolerance. Then don’t deviate from this strategy.
5. Looking at Investment Portfolios Too Often
Some people obsessively monitor their investment portfolios, which leads to excessive adjustments. Don’t fall into this trap, as you’ll likely lose money. Additionally, this practice creates unwanted stress. There’s a difference between casually observing versus micromanaging your investments. Don’t forget the Oppenheimer polar bear who casually hangs out on the ice, not really doing much of anything.
Now that you know the five most common investment mistakes, make an effort to avoid them! To get more information on this, listen to our podcast below.