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Even the savviest and most experienced investors make mistakes from time to time when it comes to padding their portfolios. Erroneous investments can be made for myriad reasons, from poor analysis to just having an off day. The key to reducing the likelihood of making mistakes in the market is to be aware of what some of the more common mistakes are that investors tend to make.
1.Making Investment Decisions Based on Emotion
When you get to know the intricacies of successful investing, it is difficult to deny that it is something of an art and a science. The science behind it can essentially be boiled down to analysis in all of its varied forms. Emotion can play a part in this process, and sometimes it can even be helpful. But making investment decisions that are based purely on emotion is a recipe for disaster. In the world of investing, emotion equals bias and bias can lead to misevaluation, mistakes, and heavy loses.
2.Not Exercising Patience
One of the most glaring problems in American society is our tendency toward a “microwave mentality”. That is to say, we are a culture that craves instant gratification, and when that mentality seeps into our investment strategy problems are almost sure to follow. The most successful investors are masters of patience. It is not uncommon for a particular investment to be stagnant or to perform below expectation for years only to do a 180 and suddenly turn into a solid performer. That’s why investment manager have strategies – so that certain investments can play out a full cycle and that takes time.
3.Relying on Friendly Recommendations
Ironically, friends are some of the worst people to takeinvestment advicefrom unless that friend happens to be a seasoned manager. Recommendations that don’t come from professionals have tremendous potential to fail because many people will recommend a particular stock or mutual fund based on hearsay, or because of how it performed the year prior. Neither of these are solid reasons to invest in a stock. It’s not to say you should never take friendly recommendations but rather that those kinds of recommendations probably require a bit more scrutiny on your part.
4.Relying Too Heavily on Past Returns
This is in the same neighborhood as number 3 above. Making an investment decision should include a solid and thorough evaluation of that stock or fund’s performance during times when overall market performance was down. That performance should be compared against similar stocks or funds and if it actually performed better, then there may be risk controls for that investment which would indicate that it’s probably okay to move forward on it.
5. Not Knowing When to Cut Loose of a Losing Investment
Many investors who have a particular stock that loses value over time want to believe that it will eventually rebound. Once it does, they promise themselves they will sell it once it breaks even. But in reality, when investors see a bad investment making a comeback, they want to naturally hang on to it expecting that it will become a winner. Sometimes this happens, but most times it does not. It is good to just admit that you made a mistake, sell at a loss and lick your wounds, and move on.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
