Successful investments take meticulous planning, careful selection of asset classes, and consistent management of a portfolio over time. Investments turn into wealth and realise their intended objective only after doing all of this. However, even the most strategic and organised investors sometimes make these common investing mistakes.
Here are seven mistakes every investor makes that you should proactively avoid to become a successful investor:
- Not having an investment plan: It is as dangerous to invest without clearly defined objectives and a structured plan. It is similar to leaving for a long vacation without an itinerary or funds. To achieve your short-term and long-term financial objectives, it is important to have a detailed and well-designed investment plan in place.
Sticking to the plan will give you clarity about where, when, and how much to invest. It will also help you outperform your peers in terms of returns.
- Not knowing your risk appetite: Not everyone has the patience for investing in secure bonds or low-yield liquid funds. Similarly, not everyone can day-trade stocks in volatile markets.
Starting your investment journey without knowing your risk appetite can lead you to investing in assets that can give you a lot of anxiety or leave you thoroughly disappointed. To avoid this, explore the associated risk of every potential investment and match it with your investment goals.
- Investing based on hearsay: Investing based on a hot tip or second-hand expert advice can seriously damage your portfolio over time. Just because someone made a windfall in the stock market or found a lucrative real estate deal, it doesn’t mean you will experience the same success.
- Investing based on emotion: Greed and fear are important market drivers. Greed makes amateur investors buy in a bullish market and fear makes them sell in a bearish market. Such emotional investments are rarely based on the analysis or research of an asset class.
Instead of letting mob mentality guide your investment decisions or getting over-attached to a particular asset class, develop a practical approach to investing and assess all pros and cons before moving your money.
- Not educating yourself: Another common mistake is not taking the time to constantly learn about various investment options. This leads to the trap of becoming overconfident due to some initial success. To make sure that does not happen to you, keep educating yourself and learn as much as you can about the market, products and related elements.
- Basing future expectations on historic returns: Historic returns are a good indicator of a fund or stock’s performance. However, basing expectations for future returns on past performance is a mistake. Market conditions can change and the asset class can itself evolve to match a completely different risk profile.
Therefore, it is crucial to monitor the current performance of your investments and restructure your allocation, whenever necessary.
- Not diversifying enough: Even professional investors can fall in love with a particular asset class and invest a large percentage of their investment capital in it. This mistake often exposes them to high risk and can lead to their downfall.
To make sure that does not happen to you, diversify your portfolio across assets of varied risk profiles. That way, even if some of your investments make losses due to adverse market conditions, your entire investment capital will not be lost!
You might already be aware of some of the investing mistakes to avoid. However, do not get complacent! Remember, even the most seasoned investors are susceptible to certain common investing mistakes. The best way to avoid them is to stay mindful of your investing habits and correct your path wherever needed.