Many people do not have the skills and knowledge that it takes to be successful with investments. People make a wide range of mistakes, from not diversifying their holdings properly to neglecting to start investing at a young age. However, everyone can learn to be a savvy investor given the right advice. Tom Terzis, a Wealth Specialist based in Toronto, describes the mistakes that can be made when a person is planning their investments and offers strategies and tips to succeed.
Letting Emotion Guide Decisions
When you are investing, it is vital to limit the role of emotion in your calculations. Feeling emotional about your investments is only natural, since for most people they represent a great portion of their net worth. However, using emotion alone to make decisions will lead to trouble. Emotional decisions lead to people believing that they had “hunches” about a particular stock’s movements.
According to Tom Terzis, Human behavior is an important part of selecting an investment, but the decision should largely be made based on the data, not on any sort of “hunch” or intuitive guess.
Holding Losing Investments
When people have a losing investment, they often feel the need to hold onto it until it breaks even. For example, if you buy an investment and it loses 20 percent of its value, it is no longer a good investment. Having an emotional stake in the investment or simply believing that the investment will regain its advantage will lead you down the wrong path. It is wise to sell investments that are losing value, even if your “hunches” are telling you that this stock will succeed in the future.
Patience is a must in the investment sphere. People who have just begun trading may be particularly subject to this feeling. Of course, when you buy a stock and see that it is rising, you are incredibly excited. You may find that a new investment is not performing up to snuff, and you may consider selling it. Based on the fundamentals of the stock, you may want to hold it for a complete cycle in order to see its potential. Unfortunately, it is very difficult to tell whether a stock has completed a cycle, just like it is hard to identify when a recession has ended.
Putting Too Much Emphasis on Past Returns
When you are choosing an investment, don’t be fooled by its past return record. Circumstances can change, such as the management of the company. If a stock or fund has lost 15 percent over the past year, compare it to a fund that has only lost 5 percent and consider moving your investment. If your investment can hold onto more of its value when others are falling, it is a sign that it is carefully managed and should do well in the future.
Word of Mouth Recommendations
Avoid getting your stock and investment recommendations around the water cooler. You can’t always base an investment’s performance on how it worked out for your work friend. Again, you should not put too much emphasis on past returns. “Water cooler” recommendations can be dangerous for this reason.
Not Harvesting Winnings
If you have an investment which has made a significant gain, it is a good idea to sell some of it and reinvest the profits or preserve them as cash if you need to. Human nature dictates that we would sell poorly performing investments and keep the well-performing ones, but the market doesn’t always work that way.
Investing with High Prices
It is not smart to make an investment when the market is running high. You will effectively be putting in money that will evaporate when the market goes back down. It is smarter to wait until there has been a dip in value and then to ride the wave upward. Again, you must try to eliminate emotional decisions from your playbook.
Don’t Go with the Crowd
If all of your friends are investing in a certain stock, there may be a temptation to follow them. Don’t let herd behavior dictate your purchases. Try to adopt a “contrarian” viewpoint. A good way to eliminate this problem is to turn over daily control of your investments to a trusted advisor.
Starting Too Late
While it is never too late to begin investing, the risk profile of your investments must decline sharply as you move toward retirement age. Young people who are just starting out can make the riskiest investments with some of their money and have a good chance of coming out on top. It is a mistake to wait until you have enough extra money to invest. Do all you can to reduce your daily expenses and put that money into the market. You may be giving up millions of dollars in future earnings if you wait until your forties to invest.
Neglecting to Diversify
Another key point of investment success is diversification. Make sure that your investment portfolio is well-balanced with a mix of stocks, bonds, and mutual funds. The mix can change based on your circumstances, but a general rule is to subtract your age from 110 and have that percentage of stocks in your portfolio. This means that a 60-year-old should have 50 percent stocks.
Avoiding Investment Errors
It is important to consult an experienced advisor if you are just starting out with investing. A trusted advisor can help you avoid costly mistakes. Above all, take care that your decisions are not based on emotions or peer pressure. If everyone is making the same move, consider doing something different. Tom Terzis reminds readers that if you are careful with your money, you will be able to enjoy success in the market.