The Most Common Investment Mistakes You Need to Avoid!

By Business Desk

Tuesday, July 18, 2017.

If you are looking for investment opportunities, there are many different options available to you. No matter whether you are an amateur or experienced investor, you need to be cautious before you dive into any investment. They say making mistakes is part of the learning process, and while this is true, too many mistakes can be extremely costly when investing. Below, we take a look at some of the most common investment mistakes so that you can avoid them.

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• Not having a plan – Let’s begin with one of the biggest mistakes of them all; not having a plan. After all, how are you meant to arrive at your destination if you do not know where you are going? It is important to have a personal investment policy that addresses a wide range of factors, including goals and objectives, risk, diversification, asset allocation, and appropriate benchmarks.

• Choosing investments that do not suit your risk profile – One of the most important factors any investor needs to consider is their risk profile. Don’t choose an investment that you are not comfortable with. If you are someone that is fine with high risk, it is wise to combine the likes of bonds and equities with other investment options to ensure your portfolio is less volatile overall. Commercial property is a good solution for this, as returns are relatively uncorrelated with those from bonds and equities. Of course, you will need to do your research before determining whether this is right for you. Check out this guide to buying commercial property to find out more about it. If commercial property investments are not viable, there are plenty of other ways to diversify your portfolio.

• Chasing performance – A lot of investors choose asset classes, fund, managers, and strategies that are based on recent strong performance. They feel that they are missing out on amazing returns. In fact, this belief leads to more bad investment decisions than you would realise. If a particular fund, strategy, or asset class has done well for the past four or five years, then you should have invested four or five years ago. That opportunity has already passed, and the performance of it may be coming towards the end. Don’t stick your money in now simply because you want a slice of the pie.

• Trading too much and too often – Too many people fall into the trap of playing around with their investments too much. They react to every piece of news that hear or read. All this does is generate loads of tax implications and transaction fees, which is the last thing anyone wants.

• Not enough indexing – There is not enough space on the page to go through all of the research and studies that have proven that most mutual funds and managers underperform their benchmarks. When it comes to the long run, low-cost index funds tend to be upper second-quartile performers. The desire to invest with active managers is strong, even though there is so much evidence in favor of indexing. You need to make sure you index a large portion – at least 70% - of your traditional asset classes.

• Stock buying mistakes – There are so many common stock buying mistakes, which is why we have grouped them all together. This includes compounding your losses by averaging down, overlooking the big picture when buying a stock, underestimating your abilities, buying stocks that appear cheap, day trading, buying on unfounded tips, and using too much margin. These are all factors that can stop you from reaching your true potential when buying stocks.

• Property investment mistakes – There are also many property investment mistakes that new and experienced investors make. This includes selling too soon, paying too much for a property, employing a poor property manager, shunning expert guidance, and buying in an area with poor rental demand. Other lethal mistakes include miscalculating estimates, misjudging cash flow, ducking due diligence, failing to do your homework, planning as you go, and thinking that property is a get rich quick scheme.

• Using someone else’s expectations or expecting too much – This is something a lot of new investors are guilty of; they believe that investing alone is going to solve all of their financial problems. This is especially the case if you listen to advisors that promise oversized returns. It is important to ensure your expectations are realistic.

• Overconfidence in the ability of managers – As mentioned earlier, the vast majority of managers will underperform in regards to their benchmarks. However, it is impossible to determine which managers will outperform. The best solution, therefore, is to avoid putting too much of your faith in the ability of investment managers.

• Not rebalancing – Rebalancing is a procedure that involves returning your portfolio to its target asset allocation, as you outlined in your initial investment plan. It is difficult to rebalance, as it means you need to sell the asset class that is performing well, and you must purchase more of your worst performing asset classes. It is very challenging for investors to perform this contrarian action. Plus, it is unprofitable to rebalance right up until the point where it will pay off spectacularly. It is not hard to see why so many investors fail to rebalance, but it is important that you do. Otherwise, you will be using a recipe for poor performance, as you will have a portfolio that has drifted with market returns, leading to asset classes that will be underweighted at market lows and over weighted at market peaks.

• You haven’t given yourself enough time – You should not be concerned about what the stock market does this year or next year if you are saving for your retirement in 35 years time. One of the biggest mistakes investors make is getting too focused on the short-term instead of viewing the overall picture.

Hopefully, you now have a better understanding regarding some of the common mistakes that investors make. If you can avoid the errors mentioned above, you will give yourself a much better chance of making successful investments that lead to a profitable future.