Top 5 Mistakes Investors Make and How to Avoid Them
Learning from our mistakes is a good thing. After all, if we learn from our mistakes, we are likely not to repeat them. Sometimes psychological or emotional factors contribute to making a mistake or knowing how to avoid it. Here are the top mistakes investors make and how to avoid them:
#1- Buying only companies you know. Investors naturally buy companies they’re familiar with or hear about through media sources or others. But crowd or FOMO (fear of missing out) buying can lead investors to miss out on opportunities that may benefit their portfolio. This buying additionally leads to buying companies they shouldn’t have- making an investment mistake that may cost them.
Solution: Meet with your financial professional to develop an investment strategy plan aligning with your financial goals to ensure your personal bias doesn’t impact your decisions.
#2- Failing to reassess your risk tolerance. If you haven’t reviewed your portfolio with a financial professional, you may be investing blindly without realizing your risk tolerance. Is the risk in your portfolio aligning with your current circumstances? Risk tolerance is the ‘anxiety’ part of investing. If the market is down, is your anxiety up?
Solution: Have a new risk tolerance completed by your financial professional and your portfolio’s asset allocation adjusted to reflect your current risk tolerance.
#3- Trying to time the market. Some investors think they can time the market, but reacting to information that is ‘yesterday’s news’ rarely produces returns the investor is wanting. With today’s trading technology, the average investor trying to time the market is at a disadvantage compared to active fund managers. There is trade research to be reviewed periodically to ensure that the companies are not a potential risk- and sell-offs or buys that need to execute. The average investor doesn’t have the time or know where to access this information. Remember that time in the market produces better results than timing the market.
Solution: Discuss investing opportunities with your financial professional and how they select investments for your portfolio and what research they have available. Remember that financial professionals manage wealth as their full-time jobs and rely on active fund managers to select investments that align with the investment strategy.
#4- Having overconfidence to manage your portfolio. Overconfidence can cause an investor to underestimate the market’s risks, causing them to trade excessively or hold poorly diversified portfolios. Overconfidence bias when the investor thinks of themselves as an expert, even more knowledgeable than a trained financial professional.
Solution: Meet with a financial professional to have a risk assessment completed and an assessment of your portfolio to see if it aligns with your financial and retirement goals. If the evaluations don’t indicate a correlation, there may be an overconfidence bias impacting your investment decisions.
#5- Having a short-term focus. Market noise can cause investors to shift between ‘buy and sell’ decisions basing on what they hear. Markets and financial news are about the short-term and relay sudden market swings impairing an investor’s ability to make the right decisions. If your portfolio contains investments with long-term growth potential, market noise won't impact the long-term.
Solution: Review your portfolio to ensure your financial goals can be met by investing in assets with a history of positive performance over time.