It’s normal to make a mistake or two as an investor – in fact it’s an essential part of the learning process. Because successful investing is often based on good judgment, even experienced investors fall prey to common sense errors now and then.
While it’s unlikely you’ll make perfect decisions every time, understanding the typical mistakes investors make can go a long way to helping you avoid them. Here are 5 of the most common financial traps and on how to dodge them:
- You don’t make a plan.
If you don’t know where you’re going, it’s likely every road you take will lead you nowhere. Creating a personal investment plan and sticking to it is the first step to ensuring you make sound investments. It might not be as thrilling as trying to time the markets, but it will keep you on track and profitable in the long run – even when the market is unsettled. Ask yourself:• What are my investment goals?
• How much do I need to invest to get there?
• What are the risks relevant to my portfolio?
• How will I measure my success?
• How can I allocate assets to best achieve my goals?
If you feel unsure about any of these questions, speaking to a reputable financial planner can help.
- You let your emotions rule.
The #1 principle of investing is to buy low and sell high. So why do so many investors do the exact opposite? They let fear or greed drive their investment decisions. Never buy high just to maximise short-term returns. Instead, focus on the larger picture – while returns can deviate wildly day-to-day, historical returns can average around 10%. Better still, capitalise on the emotions of other investors by taking advantage of their irrational decisions.
- You’re not diversifying enough.
Don’t think maximising your returns means concentrating on one sector. Diversify to create a portfolio that incorporates acceptable levels of risk and return across changing market scenarios. But maintain a balance of diversification – too little and you risk disaster if the market moves against your chosen sectors; too much and you risk overexposing yourself. If in doubt, consult a professional for guidance.
- You allow yourself to be swayed by the media.
With 24-hour news cycles, it’s easy to get steered in a wrong direction. The key thing to remember is that by the time trading information reaches public media, it’s already been factored into market pricing. Instead of jumping on a bandwagon, glean valuable information above the media noise – gather details from multiple independent sources and do your research thoroughly.
- You underestimate yourself.
Don’t believe you can’t excel because a) you’ve never done it before, b) you’re not a sophisticated investor, or c) you’ve got a day job. Successful investing is largely about planning and common sense. Take time to learn, research and create a sound investment strategy, and ask for advice if you need it. You’ll have a profitable portfolio in no time.
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