Each person’s individual investing strategy may be different, but there are things every investor should avoid. Many individuals start investing with little to no education about the markets and learn the hard way by losing money. Instead, take note of these four investing mistakes.
1. Trying to time the market. Popularized by film and social media, day trading appeals to many because of the high rate of returns. Not only that, it’s been personified as a get-rich-quick method when, in reality, that is far from the truth. Day trading or trying to time the market is highly risky and typically results in loss of principal and even more.
Instead of trying to time the market, you should aim to slowly add to your portfolio and dollar cost average over time to let your money grow. Certainly, there are successful active managers, but risking your retirement to try to make extra money is not worth it. Instead, look for mutual funds and exchange-traded funds that suit your investing goals, and use them to create an investing strategy that fits your needs and allows the overall market to build your wealth over time.
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2. Failing to properly assess risk. It is easy to get caught up in the glamour and returns of investing. But don’t forget that just as quickly as the market built your wealth, the market can take it away. Unfortunately, many investors fail to see the downside risk and only focus on upside potential. If you invest over the long term, there will inevitably be a period of time when you lose money. It is how you mitigate the risks and insulate your portfolio that matters.
Another purpose of risk management is to implement a buffer between your investments and your emotions. The human mind can be your own worst enemy, because investing is a long-term game and the human mind is geared for instant gratification. Irrational thoughts tend to enter the mind in times of elevated levels of stress.
Risk management will allow you to detach emotionally and stick to your game plan through the ups and downs of the market.
3. Not diversifying your investment portfolio. Putting all of your eggs in one basket is not a good investing strategy. You can make a lot of money if the technology and entertainment sectors do well and that’s where your money is, but putting all investments into one area will likely not perform well long-term.
Instead, you should look to diversify your holdings across a few different assets that have different correlations. The goal with diversification is if the market should take a hit in a certain sector or a certain market cap, your portfolio will not suffer as a whole.