“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – Warren Buffett
Investing is confusing. There are many things you need to know and many things that are out of your control. You have to make decisions with imperfect information based on multiple different assumptions, and market conditions can change swiftly, without warning. That being said, if you focus on the things that are under your control, and maintain consistent discipline, you can be a successful investor. In the interest of heeding Warren Buffett’s sage advice, let’s look at five common mistakes investors make in the hopes you’ll avoid making them yourself.
1. Not having clear goals
If you don’t know where you’re going, how do you expect to get there? And how will you know you’ve arrived? To achieve your financial goals, you have to first figure out what they are. You might want to retire by age 60 with $3 million. Or maybe you want to have enough money to take amazing trips every year while saving enough to retire by age 65. Whatever they may be, the clearer your goals are, the easier it will be to devise an investment plan (insert link to Investment Plan article) to try and achieve them.
2. Not diversifying your portfolio
One of the keys to investment success is to properly diversify your investment portfolio (Insert link to Diversification article). Many investors make the mistake of allocating too much money to one investment or asset, which leaves them vulnerable to severe loss if the price drops. Another mistake is failing to periodically rebalance your portfolio. Your investments will fluctuate in value over time and your portfolio will need to be adjusted to maintain proper diversification. Diversification reduces your risk exposure, which means you’ll have a better chance of not breaking Buffett’s Rule #1 and #2. The great thing is that diversification is easy to do – just spread your money around in different investments that aren’t correlated to each other.
3. Not doing your research
It’s important to do your research before making an investment. Just as you would familiarize yourself with a patient’s history and current condition before making any recommendations, you should understand the background and relevant details of any prospective investment. If it’s an ETF or mutual fund, what does the fund invest in? What is its expense ratio? What is its historical performance? For an individual stock, how does the company make money? What is its competitive advantage? There are a number of questions you need to answer before making an investment. Do your due diligence.
4. Letting your emotions make the decisions
Investing can be exhilarating. And stressful. And exciting. And nerve-wracking. And any number of other emotions. Once you’ve taken the plunge on an investment, it can feel like stepping onto a roller coaster (depending on what you invest in). And the market can, and does, take rapid swings that often seem to come out of nowhere. When you’ve got your hopes and dreams tied up in your investments, it can cloud your judgement and cause you to act recklessly. This is why it’s crucial to have an investment plan and stick to it. Automate it as much as possible – set up regular contributions and keep an eye on your portfolio but resist tinkering with it unless absolutely necessary. Avoid making snap judgments in response to what the market is doing at any given moment. Sticking to your plan and removing emotions from the equation will help you steer the course through times of volatility.
5. Focusing on the short term
Saving for retirement is a long-term proposition. You may have many years before you’ll access these funds, which is an advantage very much in your favor. It means you have time to achieve your investment goals. It also means you have time to navigate some of the setbacks you’re likely to encounter on the way, including market corrections, bad investment choices, and other unforeseen obstacles. It also means you need to keep your focus on the long-term. Try to ignore what the market did today, this week, or this month. You do need to keep tabs on your investments, but you can lose your long-term focus if you keep too close a watch. If you’ve constructed a well-diversified portfolio tailored to meeting your investment goals and risk tolerance and check it on a regular basis and make any necessary adjustments, you should get to where you’re going. In the meantime, ignore the financial media because like much of media, it’s designed to get your attention, not necessarily to inform you. Ignore the noise and keep your eyes on the horizon.
There are many mistakes to be made as an investor. We’re human and that leaves us open to stepping into all sorts of investing minefields. The best way to avoid these hazards is to have a plan before you begin and stick with it. This may sound easy, but it isn’t. It’s easy to come up with the plan. The hard part is sticking with it. But if you do, you’ll be that much closer to achieving your financial dreams.
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