Investment mistakes can cost you cash, and that is the reason you should avoid them. Successful investing is not just about choosing the right stocks. One should also avoid simple mistakes that may undo all the past hard work.
Quite possibly the most widely recognized mistake while putting investing into worldwide financial exchanges is an absence of appropriate investment objective. You need to explain your investment objective and deploy the best tools to achieve these goals. The objective can be anything – putting something aside for your child’s foreign education, making a retirement reserve, or simply supporting your costs. The significant thing is to plan properly.
Several research studies show that asset allocation is the key to a successful investment portfolio. However, investors make a common mistake focusing on picking individual stocks instead of doing proper asset allocation. So instead of choosing the next hot stock, you should aim to correct the asset allocation first.
The problem occurs when you go with emotions while investing in the company and ignore the obvious red flags. While “buy right, sit tight” holds true, keep your wits about you when you see the fundamentals of the company are being compromised. A couple of red flags you can look out for are if the sustainment is in underperformance quarter-on-quarter, if the non-performing assets (for banks and other financial institutions) are going up, or if there is any sudden or abrupt exit of the senior leadership, etc.
Often, we turn to our well-meaning friends and folks for advice on important matters in life and finance is no different. However, when it comes to stock investing, banking upon the advice of your friends and simply buying stocks that they bought is not the best way.
This does not work because your risk profile and financial objectives may be starkly different from the other person and what has worked for him may not work for you. So, soak in all the information but conduct your own due diligence about the company and convince yourself thoroughly. Only when you feel your objectives align with that of the company should you go ahead and invest.
Another common mistake in stock trading is trying to time the market. It is challenging to time the market, and even seasoned investors often fail to do it right. A famous study (Determinants of Portfolio Performance) on American Pension Fund Returns showed that around 94% of the portfolio’s returns result from correct asset allocation, not from market timing or individual stock selection.
Successful long-term investing is 1% action and 99% patience. However, many investors lack that patience and end up continually tinkering with their portfolios. To have a disciplined approach, you must look beyond the short-term volatilities and concerns and concentrate on the market’s long-term growth potential. Market fluctuations are bound to happen. However, it’s crucial to stay the course and stay invested if feasible.
One of the most common mistakes while investing is relying on historical returns. Past results are often not accurate indicators of future performance. For long-term investors, predicting the market is not practical, and they should not attempt to do so either. The goal should be to build a portfolio with a long-term investment horizon, with historical performance only serving as risk indicators for an asset.
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