Rosalind Evans
Navigating a successful path is about more than just making the perfect decisions, but rather steering clear of potential missteps. A vital aspect of this strategy applies to investing, where dodging common pitfalls can provide a substantial competitive advantage.
Here are ten frequent missteps among investors:
1. Preferring brand over data.
Even if an investment proposition comes from a renowned financial institution, it only sometimes makes it right for your portfolio. Scrutinize historical returns and critically evaluate the nature of the investment. Analyze what could potentially jeopardize those returns.
2. Prioritizing high returns over capital preservation.
Wealth accumulation often stems from safeguarding capital rather than chasing the latest hot trend. The graph below from investment firm Halbert Hargrove illustrates this point. Despite all portfolios starting at $1 million with an average return of 5%, the one experiencing the least volatility reaches $3.8 million by year 30, while the most volatile peaks at $1.8 million.
3. Believing in “risk-free investing.”
Remember the old saying, if it sounds too good to be true, it probably is. This principle applies to investing as well. If an investment offer seems implausible, double-check it; there’s likely a hidden caveat.
Be wary of schemes promising quick, effortless riches. Research any investment opportunity and consult a financial professional before committing your resources.
4. Following the herd can result in buying at a peak and selling at a trough.
The surge of “meme stocks” during 2020 and 2021 is a prime example. Case in point: GameStop, a struggling video game retailer, saw its stock price soar when Reddit users from the Wall Street Bets subreddit promoted it. This caused significant losses for hedge funds betting against it, like Melvin Capital, which reportedly lost around 53% of its value in January 2021 due to the short squeeze.
5. Failing to conduct personal due diligence.
With access to endless resources, it’s now simpler and cheaper to educate yourself. Comprehensive diligence includes studying the asset or company, scrutinizing financials, evaluating management, assessing the competitive landscape, and identifying potential risks. If you depend on someone else for your due diligence, ensure they’re adequately qualified and experienced.
6. Taking concentration risk over-diversification.
Concentration risk comes in many forms: investing in a single company, sector, or geography, to name a few. To mitigate this risk, diversify across different assets, sectors, and regions, thus reducing the impact of any single investment on overall portfolio performance.
7. Holding an excessive cash reserve.
In an era where inflation exceeds historical norms, holding too much cash can dent your returns. This doesn’t imply you should put all your liquid assets into high-risk investments. Plenty of safer options are available: alternative investments, index funds, treasuries, and certificates of deposit.
8. Remember to adjust your portfolio’s risk levels.
What works for a young investor may not work for someone approaching retirement. As you progress through life, reassess your risk tolerance.
9. Relying on “gurus” rather than trusting your judgment.
While it can be fun to follow financial gurus, their advice should not be the sole basis of your investment decisions. Their recommendations are often generalized and may not suit your specific situation.
10. Don’t let your investments rule your life.
Money is a tool to achieve your life goals, not a goal itself. Overemphasizing the quest for wealth can lead to stress and reduced quality of life.
The journey to sustainable wealth is about more than being flawless but about navigating common pitfalls and constantly reevaluating your strategies. With these pointers in mind and an eye on avoiding these frequent missteps, your investing journey can become much smoother and more rewarding. Platforms can make this process more manageable and less stressful, providing the support and resources you need for successful investing. Your wealth goals are within reach; dodge these mistakes and keep your eyes on the prize.
