Financial investment is a tricky business. On one hand, you’ve heard all the stories about the self-made millionaires, the folks who read the market, chose wisely, were in the right place at the right time and are now set for life. On the other hand, you only have to go back to 2008 to see how destructive poor investment strategies can be. It is a viable way to set up residual income, make your money work for you and generate a nest egg that will see you through your retirement and hopefully leave something behind for your children. But it can also lead to bankruptcy and despair. It’s all in the execution, and education is the key. Here are five common investing mistakes and how to avoid them.
One of the most common mistakes is investing in a product or a company you don’t fully understand. Any savvy investor will tell you that if you cannot comprehend what a business actually does you shouldn’t buy stock in that company. The folks that are really successful at this game take the time to really understand the model each business runs on. But if you don’t have the time to read through hundreds of pages of projections and mission statements, build out your portfolio with diversification. That way any misstep will be minimized.
Another major pitfall is becoming too enamored with any particular company. This is how advertising and branding can get in the way of investing success. You see a company profiled in the news, you enjoy their ad campaigns and you personally use and love their products, so naturally they would be a great fit for your investment, right? Well that’s not always the case. They may in fact be a good investment right now, but once you buy that stock you run the risk of falling in love with it. If that company changes in some fundamental way, will you be willing to let the stock go? Invest in companies you don’t have any emotional connection to, and you’ll always be able to keep profits foremost in your mind.
If you lack the virtue of patience, you could find investing seriously problematic. The layperson is enamored with the chaos of the Wall Street trading floor, but most of investing is about keeping a slow and steady pace. In the majority of situations any investment you pick up you’ll want to hang on to for years, and sometimes even decades. The goal is to ride out the fluctuations and win out based on a savvy reading of the overall market. Jumping the gun and reacting based on the chaos of the 24-hour news cycle will only cause trouble and cost you money.
On the flip side of that coin is staying with an investment for too long, with the hope of eventually making up your loses. Getting even can be an attractive motivation, but more often than not it blows up in your face. It is often better to accept the loss, sell and move on. By sticking with it you may lose more money, but you’ll also miss out on other opportunities you could have put that money into.
Possibly the worst mistake you can make as an investor is not diversifying your portfolio. Diversification is the key to success over time. This isn’t some free stock market game online where you can ride one superstar to the top of the heap. You’ve got to have your fingers in a lot of pies to succeed. That way you avoid being exposed too much due to fluctuations in any one sector of the market. Cap your interest in any one investment at 10% of your overall portfolio and you’ll be good to go.