The world of investing can seem incredibly complex, but it doesn’t have to be if you if you stick with a steady game plan and avoid common investor mistakes that are so often fueled by emotion rather than logic.
In this article and a subsequent one, we cover ten mistakes that so many undisciplined investors make. Here are the first five:
Investor Mistake One: Chasing Performance
On the surface, it may make sense to move out of sectors that are not performing well, and invest that money in high-performing investments. But the market is cyclical; and often those high performers are poised to underperform later, while the sectors you just sold are just about ready to outperform. A classic example is technology stocks in early 2000s. Many investors rushed to purchase technology stocks just as they reached their peak and were headed for a long slide down. Rather than trying to guess which sector is going to outperform, broadly diversify your portfolio across a range of investment sectors. (Learn why it’s smart to Invest in the Rain.)
Investor Mistake Two: Looking for Get-Rich-Quick Investments
When your expectations are too high, you have a tendency to chase after high-risk investments. If you have extra money you are prepared to lose, high-risk investments can be a fun lark to try, but these investments are not the place for the money you are counting on to retire. For the bulk of your investments, your goal should be to earn reasonable returns over the long term.
Investor Mistake Three: Avoiding the Sale of an Investment with a Loss
Psychologically speaking, it is far more painful for most people to lose money than it is enjoyable to win money. That is why it is so hard to admit when a stock just isn’t going to recover and to make the smart decision to sell in order to cut losses. When evaluating your investments, objectively review the prospects of each one, making a decision to hold or sell on that basis rather than on whether the investment has a gain or loss. (Find out if Fear is Running Your Investment Strategy.)
Investor Mistake Four: Selecting Investments That Don’t Add Diversification Benefits to Your Portfolio
Diversification helps reduce your portfolio’s volatility, since various investments respond differently to economic events and market factors. Yet, it’s common for investors to keep adding investments that are similar in nature, especially if they feel like they understand a certain industry or investment class. This does not add much in the way of diversification, while making the portfolio less balanced and more at risk for big swings up and down.
Investor Mistake Five: Not Checking Your Portfolio’s Performance Periodically
While everyone likes to think their portfolio is beating the market, many investors simply don’t know for sure. So analyze your portfolio’s performance periodically. Compare your actual return to the return you targeted when setting up your investment program. Now honestly assess how well your portfolio is performing. Are major changes needed to get it back into shape?
Be sure to read the second part of this series to learn five more common mistakes that investors make that could seriously hurt their portfolios. Also, don’t forget to visit our Investment and Savings article archive.