Everyone makes mistakes and when it comes to your investment strategy, some wrong moves can be worse than others. Whether you’re dipping your toes into the investment game for the first time or you’ve been playing the market for years, there’s always the possibility that your strategy may backfire. Maxing out your returns means knowing what you should and shouldn’t do with your money. Here are some of the most common pitfalls investors should try to avoid.
1. Investing Without a Plan
Investing is like anything else: the more planning you do before you get started the better the chances of success. Trying to build a portfolio without having a clear idea of what it is you want to achieve is like trying to build a house without a blueprint. Before you start sinking cash into stocks, bonds or other investments, you should take some to map out where you want to go.
You want to consider what your overall goals and objectives are. For example, do you want to save for retirement, fund your child’s college education or build your net worth? The more specific you are, the better. Next, you need to assess what level of risk you’re comfortable with. Someone who’s planning to retire in less than five years may prefer a more conservative investment strategy compared to someone in their 20s or 30s.
You should also think about what types of assets you want to invest in and which ones will help you achieve your goals. Within each group of assets (stocks, bonds, etc.), you need to look at how much diversity there is to ensure you’ve got a good balance of investments. Having a written plan gives you a way to track how well you’re doing in terms of meeting your objectives and it can also give you some accountability. Without a clear investment strategy, you’re effectively shooting in the dark.
2. Making Emotion-Based Decisions
Making any decision based solely on emotion can spell disaster and that’s especially true when it involves your finances. Buying a particular investment just because you have a gut feeling without doing your research first could leave you empty-handed. When you’re debating whether to invest in a particular type of asset, you want to look at the bigger picture and run the numbers to see if your instinct is on the right track.
On the flip side, you should also avoid letting your emotions dictate whether or not to sell an investment that’s turned out to be a dud. If you’ve got an investment that’s consistently losing money it may tempting to hold on to it in the hopes that it will turn around. If, however, you’re waiting to sell because you don’t want to admit that you picked a loser you’re really only hurting yourself in the long run.
3. Putting Your Investments on Autopilot
If you’re not actively managing your portfolio, you could be doing yourself a serious financial disservice. That doesn’t mean you have to constantly monitor your investments 24/7 but you should be checking in regularly to evaluate how you’re doing. This includes routinely rebalancing your portfolio so that it reflects our overall investment goals.
4. Following the Crowd
What works for one investor won’t necessarily pay off for another and you need to be wary of following the crowd. Financial news shows, for example, specialize in spouting investment advice for a broad audience but that doesn’t mean it will work with your investment strategy. The same is also true of advice you get from friends and family members. Even if a stock or mutual fund comes highly recommended, you should still do your research first to make sure it’s a good fit.
5. Being Impatient
Whether you’re investing a little or a lot, you want your investments to perform well and generate the best returns. This means developing a long-term strategy and sticking with it. If you’re constantly shifting your assets around in an effort to chase returns you’re not really giving your investments a chance to show you what they can do.
The same is true if you’re only buying investments based on recent performance. Just because something has done well over the last few years doesn’t mean it will continue to do so. Looking at an investment’s complete history will give you a better idea of what you can expect in the future.
A big part of being successful as an investor is using your common sense. Knowing where potential missteps may occur can make a big difference in how well your investment strategy pays off.