Investing is often acknowledged as one of the most efficient ways to build wealth over time. All you have to do is look at the current savings yields to understand that you probably aren’t going to build up your nest egg with the help of cash products.
Instead, investing can help you improve the chances that you will find success as you work to build wealth. However, success isn’t a foregone conclusion. Indeed, many investors fail, and for the following 5 reasons:
1. Too Much Following the Herd
Warren Buffett famously said that you should be fearful when others are greedy, and greedy when others are fearful. Unfortunately, this idea that you should avoid herd mentality is not one that is practiced by large amounts of people when it comes to investing.
Instead of stopping to think about the situation, many investors just follow the masses. When everyone is panicking, it’s easy to panic and dump your stock – even if the fundamentals remain sound. And, when all the other investors seem to be buying a certain asset, you might be inclined to join in the throng. Unfortunately, this usually means you are buying high, since demand is high.
Don’t follow the herd. Instead, look at your investment portfolio, and make your evaluations based on fundamentals, as well as what is probably undervalued.
2. Not Enough Planning
Success with investing requires a certain amount of planning. You need to create a plan for your money, and your portfolio. Consider your goals, and a realistic timeframe for achieving them. You need a good plan if you want your investments to succeed. Figure out what you want your portfolio to accomplish, and then create a plan and asset allocation that is likely to help you reach your goals. Then, stick with your plan; don’t drop a good plan at the first sign that everyone around you is panicking.
3. Paying High Fees
One of the main ways that many investors erode their returns is that they pay high fees. Investment fees cut into your real returns, and reduce your wealth. There are a number of high-fee investment products out there, and you want to avoid them whenever possible.
Consider your investments, and the fees you are paying. An actively managed mutual fund can charge annual fees in excess of 2%. Contrast that with index funds and ETFs that often charge between 0.25% and 0.75%. That can make a big difference over time. Also, consider what you are paying in terms of transaction fees. There are plenty of brokers that offer trades for $4.99, instead of $9.99. Review your investments, and figure out whether you are losing money because you’re paying higher fees than you need to.
Related: Indexing with ETF or Mutual Fund?
4. Too Much Trading
One of the pitfalls that many investors fall into is the idea that they need to actively trade. While active trading can be profitable for some investors, many “regular” investors find that active trading might not be the best option. This is because it’s easier to fall into the herd mentality trap when you constantly trade. The more transactions you participate in, too, the more likely you are to make mistakes with your judgment. On top of that, active trading can easily lead to extra fees. When you trade actively, you end up paying more in transaction fees, and seeing greater erosion in your portfolio.
Before you start trading aggressively, really look at your habits, and consider whether your penchant for trading a great deal is resulting in too many losses from poor decisions and a multitude of fees.
5. The Idea that You are an Investing Genius
My husband, a psychologist, can point to a number of studies that indicate that most of us humans believe that we are “above average” when it comes to intelligence. We tend to think that we are smarter than we really are. Additionally, when we are successful at something, we tend to take more credit for it than we really deserve.
So, when an investment does well, the tendency is to believe that it’s because we are investing geniuses. Unfortunately, when an investment does poorly, many of us don’t chalk it up to a poor decision. Instead, the tendency is to blame the losses on other factors, such as volatile market conditions.
what you pick is likely to do well. Take a step back, and realize that you might have just been lucky that time. Instead, develop an investing strategy that makes sense for you and your life goals.
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.