Each person’s investing strategy will not be exactly the
same as the next person’s. On the other hand, there are general things that an
investor should try to avoid at all cost. Here are some of them.
Timing the Market
Day trading has gained popularity in part due to films and social
media, attracting many traders because of the high rate of returns that it
provides. Perhaps more importantly, it’s
been personified as a get-rich-quick scheme. But that’s not quite the truth.
Day trading or attempting to time the market faces you with
a high degree of risks, usually ending with a loss of principal and even more
than that.
Rather than trying to time the market, it’s better to slowly
build up your portfolio and use a strategy called dollar-cost averaging to let
your money grow. Of course, there are successful active managers. However, risking
your retirement in an attempt to make extra money is not a good plan.
The better plan is to look for mutual funds and exchange-traded
funds (ETFs) that suit your investing goals, and use them to create an
investing strategy that fits your needs and enables the more effective build-up
of your wealth over time.
Faulty Risk Assessment
Bear in mind that the market can take away your riches just
as fast as it can give you wealth. Many investors are sometimes blind to the
downside risk and focus only on the upside potential. If you are using a longer
term approach to investing, it is inevitable that you experience a period of
time when you lose money. What’s more important is you try to mitigate risks
and protect your portfolio.
Another reason why it’s important to manage risk is that you
have to have a buffer between your investments and your emotions. Your own mind can be your worst enemy since
long term investment strategies take time to show results and humans are prone
to their need for instant gratification. Irrational thoughts and illogical
decisions arise when the mind is strained with stress.
Not Diversifying
Concentrating all your money in one kind of asset is never a
good strategy. If the particular sector or industry you betted on perform well,
you can reap great benefits, of course. However,
if you take a longer term view, concentrating all your money in one asset will
not work well for long.
Rather than putting all your eggs in one basket, try to
diversify your holdings across a few different assets that have different
correlations. The main goal of diversification is to insulate your portfolio
should the market go south.
Being Unaware of Your Investments
You should always know what you’re getting into. You should
understand how a company and its stock work. This can benefit you in two ways.
First, you’d be able to know what to expect from the stock
or the fund. If you are fond of technology companies, you will know how they
will probably perform in the stock market.
Second, you may be able to talk about your portfolio with
great confidence. Having confidence when
talking about your investments will not only make you more aware. It will also
show that you are confident of your plan of attack.
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