Making mistakes is an important part of human characteristic– it helps us learn and grow. But very few of us are conditioned to recognize the mistakes we make and we occasionally succeed in not repeating them.
This is especially true when it comes to making decisions regarding financial investments. Many investors are tuned to take investment decisions based on their ‘gut’ feeling & tips fueled by emotions rather than a rational thought process. This is one of the first missteps that you can take on your journey towards becoming a successful investor.
Confused ?– below is a list of the 5 most common investing mistakes to avoid:
- Trying to time the market
This is one of the most common mistakes that most investors – both new and seasoned – tend to make. When the markets are zooming up, hitting new highs, they tend to get overconfident and believe that the trend is likely to continue upwards. Moreover, for some, the question of ‘when to buy’ creeps in. For others, there is a concern whether the markets signal potential overvaluation and whether the investor should wait for correction
It is crucial not to try to time entry and exit points in trading and investment strategies. Focus must be on the quality of the stocks, its growth prospects and valuation analysis to determine whether investment can be made or not.
- Overconfidence / Averaging or ‘holding stocks at loss on emotional basis’
Many investors let emotions lead to an attachment with a stock selection. A good investment may make you want to continue holding the stock even after the target exit price has been met, in hopes of a potential continued upsurge. On the flip side, a bad investment may lead you to not want to exercise stop loss but continue ‘hoping’ that things will improve in the future. This generally happens with stocks where there is a tendency to then buy more to ‘average’ out the cost in hopes of better gains in future.
It is important to cut your losses and have an exit strategy, without letting emotions rule investment decisions
- Other people’s opinion or acting out of market panic or euphoria
When it comes to investing, it is not often that one is required to react immediately. However, in situations when the markets seem to be in a panic mode, it pays to be patient and calm before taking any action.
Similarly, making investment decisions based on what others say or their opinion without doing your own analysis and research is a fundamental flaw in any investing strategy.
- Over-diversification
While it is possible to invest too little or too much money in one stock or asset class, it is also possible to go overboard and allocate to too many trading strategies.
Diversification needs to be done in a thoughtful manner with an eye on careful evaluation of risk and return parameters of investment as well as financial goals.
- Not having clear investment goals
For most investors, having one or other financial goals is critical to determining their portfolio creation and trading strategy. While most investors tend to have these goals, they are usually not classified into short-term and long-term. Shorter term goals may mean buying a house or a car while longer term goals typically involve retirement planning. Trading to leverage as much as possible to make more money can help in meeting short term goals but the long term goals may begin to suffer.
It is crucial to identify your financial goals when it comes to investing so as to not save too much for retirement and at the same time not take too big a risk to make enough money to buy a new car.
Thus, understanding human behaviour when it comes to investing is crucial so as to easily avoid most of the above mentioned pitfalls and secure a comfortable, financially healthy lifestyle