Every investor makes mistakes, even the most successful and legendary investors like Warren Buffett and Carl Icahn. More importantly, there are some common investor’s mistakes that are often repeated.
All investors make mistakes while investing in stocks and mutual funds, so if any investor claims that he has never made any mistake, he is not an investor.
A true investor first admits that he has committed a mistake, learns the desired lesson from his mistake so that he does not repeat the same mistake in the future and then moves on to make more investments.
More importantly, some investment mistakes can be very costly, even will ruin your retirement plan.
So, here are the most common investor’s mistakes to avoid.
Lack of a Plan
This is a critical mistake. If you don’t have a plan, how do you know you’ve reached your destination?
Too often, people tend to invest into stocks, ETFs and property market but there is no right investment plan or a strategy.
So, the investors should have a personal investment plan with 3 key things.
First you must set the goals and objectives. Find out what you’re trying to accomplish. Accumulating certain money amount for your kid’s college education or a larger amount for retirement at age 60?
The second thing
Third is asset allocation and diversification. Decide what percentage of your total portfolio you’ll allocate to local and overseas stocks, bonds, or other investment tools. Allocating to different asset classes is a must to minimize your investment risk.
Besides, your asset allocation should accomplish your goals while addressing relevant risks. And don’t forget the final goal and keep reminding yourself to stick to the plan.
Making Emotional Decisions
One of the most common investor’s mistakes is making emotional decisions. Emotions can over-ride important factors in the investment decision process like rational reasoning, common-sense and logic. Your fears and emotional desires can lead you to make irrational, illogical investment choices and they can prevent you from making smart decisions.
Some ways that investors can avoid making emotional decisions is to not look at their accounts on a daily basis. It is known that people feel losses twice as worse than they feel gains. Thus, at the sight of losses, their inclination is to sell to avoid further losses.
It is so important to have and periodically review your allocation and financial plan to ensure they still fit your goals.
Listening to Investment Hype
With the rise of social media, there is now a quicker, more efficient way of gathering data to influence investors’ judgments. But the fact is that the information is overload and there are a lot of fake investment tips.
Besides, most “experts” in social media platforms are confused by investing just like you, or if they’re confident. Outcomes are always probabilistic at best because the future will always be unpredictable. Nobody ever truly knows what will happen, including the experts.
Not Understanding the Downside
When you buy an investment, you should plan on worst-case scenarios occurring when you invest. It is true that past performance isn’t guaranteed to repeat, but it does give us an indication of what to expect on the downside.
So, it’s important to know how your investments performed during recessions, wars, terrorist attacks, and elections. And it’s happening now! The stock market is very volatile in these two years due to the international trade war and political uncertainties.
If you don’t understand the risks at the outset, you are more likely to react poorly during periodic market setbacks and get scared out of the market.
Most of these common investor’s mistakes can be avoided by having a clearly defined, long-term investment strategy. Before investing, you should develop a proper diversification strategy, a system for evaluating the performance of investments, and solidify your long-term investment goals.