Picture this: you’re at a get together with some friends and one person is bragging about their latest stock market move or another incredibly successful investment they made. And you too can make high returns in just a couple of months! Sounds pretty great, right?
Turns out, it’s not as great as it seems and you run the risk of losing a lot of money. Unfortunately, most of us have been in that type of situation before, so don’t beat yourself up about it—but be proactive for next time. Here are the top 7 most common investment mistakes to avoid for a healthy and successful portfolio:
1. Not fully understanding the investment
If you don’t understand the investment model and how your money will be used, it’s probably not the right investment for you. Do your due diligence before investing in anything! That includes your own research, talking with references, analyzing case studies, and asking a lot of questions along the way. This process takes time, but it’s better to be overconfident than under-prepared.
2. Not being patient
As the saying goes, slow and steady wins the race. Understanding the investment to its fullest extent will help set expectations to “see it out” to the end. For example, let’s say you were told to expect higher returns after one year and at 8 months in, you’re not happy with the performance. But you can’t expect an investment to perform differently than how it’s designed to.
Many investments are volatile which means that your portfolio performance may suffer at times—but that’s the risk that comes with investing. Have realistic expectations when it comes to your portfolio performance and remember that investing is not a ‘get rich quick’ situation—it takes time.
3. Not having a clear investment plan
Before you start investing, you should have a clear understanding of your financial goals. What life stage are you at? Investment goals are very different at 25 versus 65, when retirement weighs most heavily on investment decisions.
Know where you want to be in 5, 10, 20 years, and what risks you are willing to take to see those goals realized. Maybe you want to buy a house, travel across Europe, start your own business, or raise a family. Whatever you want to do, understanding what your goals and values are will help determine the right investment plan for you.
4. Not diversifying your portfolio
Realize that most investments are cyclical, and by placing all investment “eggs” in the same basket heightens the risk of over-investing in a down market. While some experienced investors may find success investing in a set of particular investments, it’s important to diversify your portfolio to reduce the overall level of risk and improve long-term portfolio performance.
On the flip side, investors can make the mistake of over-diversifying. Try to find 2-5 markets you like and become experts in those, so you don't spread yourself so thin that you can't keep up with everything.
5. Making emotional decisions
Many decisions in life come down to emotions: fear, love, anger, greed, ect. But when it comes to investing, it’s important to make decisions based on facts and strategy.
That doesn’t mean you should ignore your “gut feeling”. If you don’t feel comfortable with an investment, it’s not the right investment for you. However if you don’t feel comfortable with an investment because you’re not sure how it works, then that may mean you just need to ask some more questions.
Take our beginning scenario as an example. By trusting this person at a party because they seem confident and successful is a prime example of making an emotional decision. Even if you do trust a person or love a company, that doesn’t mean that you should skip the proper vetting steps.
6. Trying to time the market
No matter how hard you try, you can’t outsmart or perfectly predict the market. Even professionals who have been investing in a particular market all their lives still can’t time the market exactly.
The investment market is often very volatile and trying to time it to invest at the perfect time will only cause you more stress and heartache. It can also impact your returns because waiting for that perfect time often causes investors to wait too long to invest.
Be willing to take your winnings when you can without holding out for the very top of a good run. But also be willing to cut your losses before a market downturn puts you at risk for losing all.
7. Following bad advice (especially on social media)
Financial content is available wherever you are via apps, social media, newsletters—you name it. There’s no lack of information available, it’s the quality of information that’s lacking. Again, this is why you need to research your investments and who you’re investing with. If you see something really interesting on social media, bring it up to your financial advisor or investment professional.
Buying based on social media content, online recommendations, or other advertising is always risky, so before you make a rash decision, get the advice of experts in the field and do your due diligence.
You can’t predict the market, but you can be better prepared for it
The bottom line is that investing can be risky and you will make mistakes—it comes with the territory. But recognizing those mistakes, learning from them, and avoiding them in the future will help you succeed as an investor.
If you’re new to investing, take a look at some of the basics you need to know here.