7 Common Investing Mistakes to Avoid
You're at a public gathering one day and, a loudmouth is spending all his time bragging about his latest investment. Except, you know that poor soul has made probably the worst mistakes one can make and, he will soon be stuck between a rock and a hard place when it comes to upsetting financial situations. To describe to him his fate, here is a list of seven investing mistakes one should be sure to avoid.
- Not understanding the investment
In times where people follow the latest trend, there may be the chance that you don't truly understand what the investment is all about. Always be cautious about investing in companies whose business models you don't understand. Build a portfolio of mutual funds or exchange-traded funds and ensure you run a thorough background check before investing.
- Playing the emotional card
Greed and fear can be powerful determinants. Greed may cause someone to take too big a risk; make them invest much larger than what they intended for. Fear may do the exact opposite. Always remember to evaluate the playing field, and focus on the bigger picture. Small steps, large returns would be a perfect mantra to follow.
- Being loyal to a certain company
Have you ever met that one annoying person who bought an iPhone back in 2012 and since then, hasn’t been willing to change, despite the lack of diversity among Apple’s products? Well, unless you’re willing to invest in multiple companies, you may just become that person. Remember that stock is an investment and needs to be sold off for you to get returns. If you let it remain stagnant for long, you may miss the prime time to sell and earn profit.
- Having too much investment turnover
Jumping in and out of positions, termed turnover, might set you up for ruin if you do it frequently. Multiple costs- transaction costs, short-term tax rates, opportunity costs from missing out on other longer-term profits- might just overturn the returns you hope to get. Unless you're an institutional investor with low commission beneficiary rates, do not go around changing the placement of your eggs frequently.
- Waiting to get even
Waiting to get even, to recover previous investment's losses, may just put you at additional risk. Experts call this 'cognitive error'- it means you're waiting to sell a loser while waiting for it to revert to its original cost. Exercising too much patience may result in a loss in two ways- first, by avoiding selling losing stock, the worth may dip even lower, and second, the returns obtained from selling losing stock may be useful for investing in another project (called opportunity cost).
- Having a lack of patience
To accurately play the game, you need to level the playing field. The same occurs in the world of investments. To imagine that one will obtain immediate profit is foolishness- much like all good things, investments take time. You need to keep your expectations realistic concerning portfolio growth and timelines.
- Laying expectations on the market’s timeline
Attempting to time the market as per your expectations may not always go as planned. Experts say that calculations of profit or loss are dependent on asset allocation, and not necessarily timing or security selection.
The market is a complex entity- even with all these cautions, you may not necessarily always be a winner. But better to be safe than sorry, yes?