8 Investment Mistakes That You Must Steer Clear Of
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“The more you learn, the more you earn.”
This simple mantra should be your guiding torch throughout your financial journey. There is no single best way to make secure investments. It is only with good knowledge about different strategies that one can come to a prudent decision. There could be two approaches to learning:
- The smart way where you learn from other’s investment mistakes
- The expensive way where you invest and learn from your own decision lapses
And, there is nothing wrong in going the smart way.
8 Common long-term investment mistakes that you must avoid
To err is human, but you must avoid these 8 common long-term investment mistakes. For, they may prevent you from amassing wealth for a smooth retired life.
Mistake #1: Procrastinating
“I don’t have enough money for investing”, is a fallacy used by youngsters who just start their career. But, it is worthwhile to know, the magic of compounding ensures that even a small amount would reap huge benefits in the long run. Also, there are companies that facilitate small investments and could be scaled up in-sync with your income. Investing just $5 a day where you get 10% annual return could make you a millionaire by the time you retire.
Mistake #2: Not understanding the investment
One of the most common mistakes that investors make is not knowing the reason they are investing for. Making investments without clear goals and having no understanding of the investment, could be a major roadblock in your investment growth. For example, insurance products offer poor returns and may not be a good option for wealth creation. Hence, the choice of instruments becomes extremely important.
Mistake #3: Having a short-term plan
Expecting an overnight miracle from your portfolio is unreasonable. For most investors, frequent trading may be a mistake. You may accrue short-term profits, but as the market may turn volatile, you may end up losing most of it. A slow and steady approach towards your investment gives it the required time to potentially grow. Thinking long-term is even more important if your goal is funding retirement or college education for your kid. Your portfolio will work for you in the long run only if you have sound expectations from it.
Mistake #4: Not diversifying your portfolio properly
Diversifying, if done right, could lessen the investment risk. This is because it spreads your money across assets rather than putting all eggs in one basket. The goal of diversifying should be to add different investments rather than adding more assets with a similar risk profile. For example, if you are involved heavily in the U.S. stocks, you may want to put in some of your investments in gold, real estate, bonds, commodities and other assets. If one asset loses value, others may rise and provide a buffer.
Mistake #5: Failing to keep your emotions at bay
Emotions such as fear and greed may tempt you to invest or take out your investments form certain investments, especially, stocks. Keeping your emotions away may benefit you over a long-term horizon. You should avoid selling an underperforming asset as the market may be volatile in the short run but may rise again giving you an average return. Understand your own risk appetite to keep yourself away from chasing a few dollars of futile gains.
Mistake #6: Not seeking professional help
Just how self-medication can be dangerous, trying to solve your investment problems all by yourself may turn out to be detrimental to your financial health. If you are new to investing, you should take the help of a financial advisor who can help you with asset allocation. These experts have years of industry experience and they are well trained to make prudent investment decisions on your behalf.
Mistake #7: Making decisions based on historical returns
Just because a certain fund or stock garnered huge returns previous year, doesn’t mean it would do well in the future as well. You should not be ignoring historical averages but, at the same time, your decisions should not be solely based on it. Rather, the decision should be made keeping in mind the current market situation.
Mistake #8: Not investing enough in highly liquid assets
A liquid asset is that which can be readily converted into cash. Make sure a certain portion of your investments goes to liquid profiles such as Government bonds and large listed corporate stocks. It can be used as an ultimate risk management tool to avoid losses. Assets which have low liquidity can lock your investment and may cause unacceptable losses.
To sum it up
Investments help you live a financially secure life. And, investing is not as difficult as you think. All you need to do is make a few cautious moves.
Want to reap maximum benefits out of your investments? You can approach financial advisors. These competent experts can help you craft an ideal investment plan.