While no one has a ball of fortune with which to predict the future, there are some common mistakes that many investors make, which can be avoided.
The basics of investing can seem relatively simple, but it is important to set emotions aside in order to maintain an objective strategy that will benefit you in the long-run, and this can sometimes be quite hard to do. It is, therefore, very helpful to follow certain mechanisms to control or limit bad investment decisions.
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Here are 5 tips to take into consideration:
1. Look at the big picture and don’t just make decisions in isolation. Rather examine the potential impact that each decision could have on an entire portfolio. Failure to do this can result in you investing too much in a single asset class, industry, or geographic market. Instead of going all in with one investment, it would arguably be better to stay informed about a wide range of options that can complement each other, diversify your risk and help you to achieve your long-term goals.
2. Establish your goal horizon, then make decisions accordingly. Don’t just ignore the potential of long-term wealth accumulation in favour of short-term returns. Statistically, losses happen more frequently over a short timeframe and, as people tend to be very sensitive to losses, a behavioural phenomenon known as ‘myopic loss aversion’ occurs, which affects willingness to take short-term risks. This, in turn, results in people making emotion-based investment decisions that can have a negative effect on a portfolio.
3. Don’t just follow the crowd or do what’s comfortable in bullish or bearish market conditions. A good investment strategy is to buy low and sell high, but if you follow the masses blindly, it’s easy to end up buying high and selling low, which may have opposite results and prevent you from taking advantage of the same market opportunities. A buy-and-hold strategy is often far superior.
If you know that you can be prone to having knee-jerk reactions, you may wish to try to avoid constant information about how the market or your portfolio is performing, so that you can just focus on sticking to your long-term investment strategy. Don’t chase the news or get swept away by rumours and hot tips.
It’s also a good idea to do some research before jumping in, so that you have made a basic analysis of any weaknesses or values. Rather than following the rumour mill, it is better to make investments in things you understand.
4. Don’t trade too frequently — especially if you are prone to having a sometimes irrational bias towards action — as this can result in higher investment costs and an increase in making poor decisions.
If you ever have itchy feet, it can often be a good idea to wait a few days before executing a big financial decision and seek advice by organising a meeting to discuss an option.
5. Don’t invest money that you cannot afford to lose, as it’s important to keep cash on the side for emergencies and opportunities. You may not feel happy having some of your money just sitting there, not earning any returns, but having all your money tied up in the market is a risk that’s arguably not worth taking.
To help you make healthy financial decisions, set yourself some rules, such as only contributing a percentage of your monthly income; and establish some realistic targets, such as aiming to save a certain amount of money by the end of the year. Some people can even find it helpful to limit their options by purchasing more illiquid investments to avoid the urge to simply sell or switch on a whim or when the markets aren’t performing as desired.
Many people also find delegation a handy tool. By delegating your financial decisions to a professional who you trust to manage your portfolio, you can spare yourself a lot of stress and rest assured that you will receive sound advice as to how best to execute your financial plan to achieve your goals.
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