8 Common Mistakes Made By Investors
- Mistakes are part and parcel of the investing process. But by identifying some common mistakes and actively seeking to correct and avoid them can drive your returns to increase dramatically.
- The golden rule of investing is to never invest more than you can afford otherwise you risk not being able to pay for things like emergencies or your retirement.
- Unless your financial needs, your investment horizon or your risk tolerance has changed, do not alter your investment strategy at every downturn. Create a financial plan that outlines your objectives, approach and strategy and stick with it.
- Attempting to time the market, in other words predicting its movements is difficult and time-consuming so it is best to be avoided. Focus instead on investing for the long run.
- Diversification is when you do not put all your eggs in one basket and in contrast, you invest in a wide variety of assets so that you can minimise risk.
- Failing to rebalance your investments on a regular basis can cause problems like being overly exposed to undesirable risk or your investments not performing well.
- Conduct market research even if you have a financial advisor to take care of your portfolio, since doing so can help you understand the financial instrument you are about to invest and it will enable you to gauge the associated risks.
- Decisions based on emotions are more often than not affected by biases which could lead to inconsistencies. Do not let your emotions rule by developing a plan and taking a slower, steadier and more disciplined approached to investing.
- Your best bet to avoid making any of these or other investment mistakes is to enlist the help of a professional. CC’s experienced financial advisors can take care of a wide range of challenges on your behalf, keep close tabs on the markets and conduct thorough research to identify the best investment opportunities.
Mistakes like acting on the latest stock tipoff or investing without any knowledge on the fundamentals of the company you are about to place your money on or the stock market is often common and an inevitable part of making an investment. This coupled with the risks associated with investing could easily see your hard-earned savings go down in flames.
Although there is no perfect way to invest flawlessly all of the time, certain financial decisions can greatly affect your earning potential. To steer you clear of some investment pitfalls, we have compiled a list of 8 common mistakes made by investors so that you can avoid them and take a better approach to investing.
Investing more than you can afford
Investing is the process of putting your money to work for you. But with reward comes risk, so if you make poor choices or things go beyond your control unexpectedly, you could potentially lose it all. This may mean that should emergency strike like job loss or illness or you are close to retirement, you may not have enough funds to see you through these mishaps or life stages. Do not invest before you have established your savings and certainly do not invest with money that should be used otherwise like meeting responsibilities or emergencies. So, one golden rule of investing you cannot ignore is that you should never invest money that you cannot afford to lose.
How to avoid this mistake: Your portfolio is more than just your investments. It includes your retirement funds; your emergency cash reserves and it may also include your insurance coverage and your real estate holdings. Do not expect a smooth ride with investing. Avoid the pitfalls and exposing yourself to unnecessary risk by keeping your eyes on the big picture, being patient, keeping your costs low and by seeking the advice of a qualified and experienced advisor. Although this may not sound particularly exciting, it is the right move if you are looking to guard yourself from investment risk.
Changing strategy at every downturn
You need a cool head and resilience to get the most out of your investments. Regardless of your investor profile or goals, making the most of today’s markets and holding onto your investment returns will require you to believe in your investment strategy. Retreating and starting over each time your investments do not perform as expected is almost a sure path to ruin. Any decisions about changing your strategy should be based on careful analysis and your long-term investment plan rather than on speculation or instinct.
For instance, an equity investment could be a long-term investment, so do not make a knee jerk decision in the event of a downturn. With a good plan and a balanced portfolio, your investment strategy should not change that much that often.
How to avoid this problem: Your safest bet is to create a financial plan that outlines your short and long-term goals, as well as your approach to investing and the specific strategy you or your financial advisor will be using. A financial plan can help you delineate your objectives and where you want to go, but it can also serve as your saviour for when the markets are not performing that well. Discover further why financial planning is key to your investment success and how you should go about drafting one.
Attempting to time the market
Timing the market is when an investor attempts to predict the stock market by forecasting its movements and accordingly, moves in and out of a financial market or switches between one asset class and another based on predictive methods like technical indicators or economic data. These help an investor gauge how the market is going to move.
Proponents of market timing argue that long-term investors can potentially miss out on gains by riding out volatility as opposed to locking in returns by market-timed exits. Yet, timing the market successfully is extremely difficult to accomplish and investors who try to do so often underperform compared to those who remain more invested in their assets.
How to avoid this mistake: Unless you can dedicate sufficient time to following the markets daily, you can deal with the difficulties in timing your entrances and exits and are ready to pay more frequent transaction costs and commissions, this is a strategy you should avoid. What you should do instead is focus on investing for the long run. Work with your independent financial advisor to develop a long-term strategy with a diverse portfolio.
Little or no diversification
Many people are reluctant to try their hand at investing because they believe that it is too risky. While investing does come with risk, you are less likely to lose it all if you avoid putting all your eggs in one basket. One of the best methods for reducing risk is to ensure that you portfolio is sufficiently diversified. This means that risk is managed by including a wide variety of investments within a portfolio, while limiting exposure to any single asset.
Having said that, you should not over-diversify since it can hurt your investment returns. For instance, over-diversification can happen if you have mutual funds that own a large amount of stocks, making it difficult to outperform their benchmarks or indexes. Ideally, try to strike a balance.
How to avoid this mistake: To achieve a diversified portfolio you should vary your individual funds or securities, investment style and asset class. Generally speaking, do not allocate more than 5 to 10% of your funds to any one investment. For instance, if you opt to go with an ETF (Exchange-Traded Fund), you must allocate exposure to all major spaces, whereas if you are building an individual stock portfolio, allocate to all main sectors.
If you would like to find out more about the benefits of having a diversified portfolio, have a look at this guide on the importance of investment portfolio diversification.
Failing to rebalance investments regularly
Rebalancing is a crucial element of the portfolio management process and it consists of returning your portfolio to its target asset allocation according to your investment plan. A portfolio that is left to float with market returns will in most likelihood lead to asset classes that will be overweight at market peaks and underweight at market lows. Ultimately, rebalancing will prevent an investor from being overly exposed to undesirable risk, but it also ensures that these exposures remain within the manager’s area of expertise.
Although essential, rebalancing can be challenging since it may force you to sell certain asset classes that may be performing well and instead, purchase more of your worst-performing ones. Known as a contrarian action, this is a difficult move for novice investors, however, a professional financial advisor can help you rebalance your investments for optimal results.
How to avoid this mistake: As an investor you should regularly communicate with your financial advisor to rebalance your portfolio and make sure it stays true to your original investment strategy. This can help you reduce the risk of your investment portfolio by ensuring your investments are weighted according to fluctuations in market values. Portfolios can be rebalanced at set time points such as quarterly, monthly or annually, however, they may also be rebalanced at set allocation points, when assets change a certain amount. For example, you can rebalance your portfolio when your asset allocation changes more than 5%.
While you may think you are too level-headed to get emotionally attached to any particular investment, you would be surprised at how many seasoned investors fall prey to exactly this form of mishap. Decisions based on emotions are more often than not affected by biases which could lead to inconsistencies. Be objective at all times and see each investment as a vehicle to achieve your set financial goals. Making decisions with your heart rather than your head is definitely a mistake that could be costly.
Closely linked to this is being driven by impatience. Any given investment strategy may take several months and at times even years to start paying out. Purchasing shares of a stock and expecting these to act in their best interest right away is unrealistic.
How to avoid this mistake: At times a slow, steady and disciplined approach can go a lot further over the long haul. Do not let your emotions rule. Develop a plan of action together with your financial advisor and make sure you stick to it.
Failing to research the market
You may have enlisted the help of an advisor, however, that does not mean that you should not keep any tabs on the market or do your own research. Conducting adequate research and due diligence before investing is critical since the urgency to place your money on the latest hot stock may overwhelm the need of having the patience to do adequate research and this could prove to be an expensive lesson. Research can also help you understand a financial instrument and what the associated risks are.
How to avoid this mistake: With such a vast choice of resources and information out there, do not fall into the trap of researching blindly. Not all sources of guidance are made equal so it is significant to identify and isolate the most reputable ones. Keep track of movements in the market via our Traders Blog and of course, discuss with your advisor any queries you may have.
Not securing a trusted independent financial advisor
A financial advisor can help you manage your money, but more importantly can guide you to reach your financial goals. Offering services ranging from financial planning to investment management, building your wealth and everything in between, selecting the right financial advisor is key to your success.
For investor novices, an advisor can serve as the ideal partner to help you navigate various complex financial situations you may not have the knowledge and expertise to handle yourself, whereas for experienced investors, a professional can offer you peace of mind since they will be responsible to monitor the market and your portfolio.
How to avoid this mistake: Picking the right financial advisor for your situation is crucial otherwise you risk ending up working with someone who is not a good fit for your needs. By actively taking into consideration the complexities of your finances, your personal circumstances, as well as your short and long-term objectives, CC’s advisors can provide the necessary advice and work with you to establish investment decisions with your best interest in mind. Have a look at what our financial advisors can do for you and here are 10 reasons why you should choose CC.
Mistakes are part and parcel of the investing process. Identifying these now can greatly impact your decisions in the future, while by actively seeking to correct them, you can drive your returns to increase dramatically. Developing a systematic plan and sticking to it can increase your odds of succeeding as an investor.
If you are feeling a little uneasy about your investment plans, it is time to relax a little. Whether you are planning to invest in Bonds, Shares, Funds, ETFs or ETCs, you need an expert independent financial advisor to help you build a tailor-made investment portfolio. One of Malta’s largest independent financial services group and a founding member of the Malta Stock Exchange, CC pioneered the local financial services industry in 1972. Since then, the Group has moved from strength to strength, establishing itself as a 360-degree financial planner for investments, pensions and life insurance.
Get in touch with us today to speak to one of our experience financial advisors.