Become a Better Investor by Avoiding These Five Common Mistakes
Let’s face it: investing isn’t easy, and it becomes even more discouraging when investors face losses in their portfolio. To avoid a drawdown in their portfolio, investors should avoid the following five mistakes.
1. Not having an investment plan
Investors should have some sort of plan put together before they even jump into the world of investing and start allocating their portfolio to different investments. Having a plan guides them in what kind of investments they should be making and the risks they should take. An investment plan doesn’t have to be very lengthy; it just needs to explain the investor’s risk appetite, investment horizon, and purpose for investing their funds. Without a plan, an investor may turn into a speculator and take risks that can impact their portfolio significantly.
2. Investing in what you don’t understand
This is a very critical error. Investors need to know how the company operates before they purchase its shares. Keep in mind that this isn’t limited to stocks alone; investors should understand how any investment works before they decide to hold it in their portfolio.
For instance, long-term bonds are more sensitive to interest rates compared to short-term bonds. Investors saving for the long term must consider interest rates before buying bonds.
3. Getting emotionally attached to investments
After the crash in the stock market in 2008 and 2009 and the prior tech boom, one observation should be very apparent: markets tend to swing up and down. Investments that are good for the portfolio now may not be so great in two years. Investors need to realize this and not get emotionally attached to their investments. They need to stay in the investment as long as the reason to be in it is present; conversely, they must be ready to sell it should the reason diminish.
4. Forgetting basic portfolio management
Regardless of the investment horizon, investors need to constantly manage their portfolio and make sure their risks are managed properly. One basic portfolio management tool they might want to employ is the use of stop-loss orders. This type of order lets investors exit their position when the price reaches a certain point. It can be very helpful if an investor is unable to access their portfolio, as the trade occurs automatically.
5. Ignoring fees
Fees can turn profits into losses. Investors need to be careful about the fees they pay to manage their portfolio; for example, a broker might charge different fees to execute the order online and through the telephone. Investors need to be mindful of this phenomenon.
For investment funds like exchange-traded funds (ETFs), mutual funds, or hedge funds, investors need to be very aware of the management fees. They should find out if they will be paying any fees up front, if the fees are based on profit, or both.