Investing and the idea of investing are known by all but interpreted differently by all. The objective of each individual is different and rightly so, as all of own retirement and wealth-building goals are different. From stocks to bonds, to mutual funds to ETF’s, if there is an investment you are searching for, odds are it is out there. However, many individuals go out and start investing, and tend to have little to no education about the markets. You can learn the hard way, by losing money and wondering how, or simply continue reading this article and we’ll provide you with some simple investing mistakes to avoid.
Timing The Market
Popularized by films and social media, day trading appeals to many because of the high rate of returns. Not only that, it’s been personified as a get rich quick method when in reality that is far from the truth. Day trading and trying to time the market is highly risky and typically results in loss of principal and even more.
Instead of trying to time the market, you should aim to slowly add to your portfolio and dollar cost average over time to let your money grow. Certainly, there are successful professional active managers, but risking your retirement to make extra money is not worth it. Instead, you may want to look for mutual funds and ETFs that are suitable with your investing goals and use them to create an investing strategy that fits your needs, allowing the overall market to build you wealth over time.
Risk Management
Getting caught up in all the glamour and returns of investing is well and all, but just as quickly as your built wealth the market can take it away. Many investors fail to see the downside risk and only focus on upside potential. If you invest over the long term, there will be period of time you lose money, that’s just a matter of fact. It is how you are able to mitigate the risks and insulate your portfolio that matters.
Another purpose to risk management is implementing a buffer between your own emotions. The human mind can be your own worst enemy. With investing, you are investing for the long-term and the human mind is geared for instant gratification. Irrational thoughts tend to enter the mind in times of elevated levels of stress. Understanding your risk management will allow you to detach emotionally and stick to your game plan through the ups and downs of the market.
Diversification
We all know that one individual who puts all of their eggs in one basket. Purchasing Apple, Facebook, and Netflix, touting how they are the best things since sliced bread. Sure, you can make a killing if the technology and entertainment sectors do well, but odds are putting all investments into one area will not perform well over the long run.
Instead, you should look to diversify your holdings across a few different assets that have different correlations. The goal with diversification is if the market should take a hit in a certain sector or a certain market cap, your portfolio will not suffer as a whole.
Understanding Your Investments
Lastly, it is critical that you understand what you are buying. Many investors live by the motto understand what you invest in and that still is true today. Understanding how an investment works has two major benefits. First, you’ll know what to expect out of the company, fund, etc. If you enjoy technology and know a lot about it, you can understand if what a company is saying is good, bad, or ugly. Many times, the market reacts as a pack but if you truly understand a company, you may realize some market moves are irrational.
Secondly, you can talk about your portfolio with confidence. Individuals sometimes buy investments because their uncle said it was a good idea. He may mean well, but ultimately it is your decision and your money that is on the line. Having the ability to talk about your investments not only will make you more aware, but also show you have confidence in your plan of attack.
The stock market or market in general can be an intimidating place to the untrained eye, but once you look past it can provide you with wealth building potential. As a recap, avoid trying to time the market, just ride the waves and let your money grow slow and steady. Do not take on unnecessary risk unless you absolutely must, this will likely hurt portfolio performance. Diversify, diversify, and diversify some more, ensuring your investments are not all in one basket. Lastly, understand what you are investing in. Avoiding these mistakes will put you on the right path to building your wealth.
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