There is no single reason why an investment mistake occurs. The event happens due to many reasons, factors, and events. But it is undeniable; investment mistakes happen when there is a combination of misconceptions and misunderstandings. As the saying goes, we should learn from the mistake of others, so here is a list of the common investing mistakes people make.
Table of Contents
When Investment Plans are Not Clearly Defined
Mistakes are bound to happen when decisions on investments are not based on clearly defined investment plans. Investing is highly goal oriented so it is important to have a clear picture on where you are going, how to get there and what directions you should be taking and which ones you should be avoiding. Since investing is a goal oriented activity, it is important to consider the risks tolerated, the time and the future income. When a plan is well thought of, it doesn’t need to be adjusted frequently, a plan that is also well managed will not be vulnerable to “trendy speculations”.
A Blur Between Diversification and Asset Allocation
Mistakes occur when the investor does not clearly understand the difference between diversification and asset allocation. When we say diversification it is a strategy to minimize risk and is used to assure the size of individual portfolios do not exceed (following the different terms of measurements). Neither of the two serve as hedges against market timing devices or anything, neither of them can be done with single mutual funds or with mutual funds. The two are most easily handled using cost basis analysis.
Frequent Changes in Directions, Drastic Adjustments instead of Gradual ones
When investors become quickly bored with their plan/s, the investment can head for the wrong turn. Investing is long term, but most investors do not adhere to this very nature of investments.
Investors often enter the state of analysis paralysis, where investors are overdosed by information and are therefore rendered indecisive. This is not good for one’s portfolio. Another problem adding to this issue is the inability to differentiate sales materials from research; these are often taken as the same document. Focusing on the information supporting a logical and well document investment strategy would be better. Investors must also keep in mind to avoid future predictors.
The Shortcuts, the Gimmicks, the Promise of Instant Success
The three are almost irresistible offers for most investors, combined with the offer that the investment would only take a “minimum effort”, investors would eventually salivate. These offers usually instigate a feeding frenzy. The portfolios are filled with iShares, Partnerships, Hedge Funds, Mutual Funds, and Index Funds. Take note! Remember: products are for consumers, securities are for investors.
Ignoring Market Cycles
Most investors commit the mistake of ignoring the fact that investments are cyclical in nature. This leads to a buy of the trendiest fund, sector or security at its highest cost. Most investors interpret trends as new dynamics and usually get involved far too much. They also tend to abandon previous hot spots leading to a High Buy- Low Sell cycle.
This article on investments is written by Mark Wagner, author of different articles on business and finance. Aside from these, Mark also covers other topics on finance such as loans, text loans, personal loans, and business loans. Mark also offers guidance on how to manage budgets and debts.