We all make money mistakes. There are few of us who have made flawless decisions in our lives. This tendency to make money mistakes tends to become greater, though, when it comes to investing.
There are plenty of pitfalls associated with investing and, while you won’t be able to completely avoid all of them, you can stay alert in order to avoid falling victim to the worst mistakes. Here are 5 investing pitfalls to avoid:
1. Failure to Plan
You need an investing plan. Figure out your investing goals, and decide what you want your portfolio to accomplish. Once you have decided on a course of action, you need to de-clutter your investment portfolio and bring it in line with your long-term goals. While you might need to tweak your plan (and your portfolio) on occasion, don’t switch things up too often. You need to have guidance, and your investment plan provides that.
One of the biggest investing pitfalls is greed. You think you need to keep pushing for better returns. “Average” returns don’t seem good enough. This can be a real problem if you taste a little success, and then get greedy for more. Soon, you’re pushing the envelope, moving outside your investing plan, and trying to see unrealistic gains. Realize that greed isn’t always your friend. It’s one thing to want to improve performance, or see reasonable returns. It’s quite another to let wanting more drive you away from your thought out investing plan.
3. Over-reliance on Experts
Reading commentary and analysis can be helpful as you try to improve your returns, and keep your portfolio running smoothly. However, you do need to be careful. Just because an expert says that you should buy or sell an investment doesn’t mean that you should. Don’t rely too much on the experts. Instead, consider your own analysis. Expert opinions can provide insight, but you should also pay attention to the fundamentals of an investment, and rely on your own observations of the investment.
A lot of the financial media is sensationalism and noise anymore. Getting caught up in it can be the downfall of your portfolio — especially if you are convinced to abandon your long-term plan because of something happening in the short-term.
4. Misunderstanding the Investment
Too often, investors go forward with an investment because it seems like a good idea, or because they know someone who has done well with it. Investors often don’t understand the investment in question. Whether it’s an annuity, a commodity future, a currency, or a stock fund, you should understand how the investment works. Know what influences the investment, and understand the way it’s traded. Credit default swaps seemed like a good bet — right up until those who didn’t understand them got caught with the short end of the stick. Only invest in assets that you understand.
5. Constant Trading
While there are those who do well with active trading, the reality is that most regular investors aren’t going to excel at day trading. It’s just not going to happen. If you trade a lot, you soon find that the fees cut into your returns. Plus, you end up trying to time markets so that you aren’t stuck with losses. In many cases, it’s much easier to invest for the long term, and forget about active day trading.