Three Popular Investment Mistakes That You Should Avoid
This article is sponsored by Securities Commission Malaysia, under its InvestSmart initiative.
Successful investing involves doing a few things right and avoiding serious mistakes.
Having the right mindset will allow investors to obtain a realistic perspective of their investments. Due to misconceptions about investing, some investors may be disappointed when their expectations are not met which can lead them on a downward spiral of poor performance. Investors who have (and set) a realistic expectation of their investments are more likely to achieve their long term financial goals.
To avoid failing to achieve your long term financial goals, here are 3 popular but WRONG investment tips and why you should avoid them:
1. Timing the market
When it comes to investing, market timing is one of the most controversial subjects. Some insist it is impossible while some “experts” claim that for the right price, they can do it for you perfectly. The truth, however, often sits somewhere in between. Successful market timing requires two correct decisions: know when to get out and when to get back in. That’s it, right? In reality, it is never that simple to time the market.
Warren Buffett says that people who assume they can predict the short-term movement of the stock market by following other people who time the market are making a big mistake. Even Buffett himself doesn’t try to time the stock market, although he has years of experience in investing and has a very strong knowledge of how the stock market works.
2. Following investment trends blindly
Buffett once said, “Be fearful when others are greedy, and be greedy when others are fearful!” and this has proven to be timeless advice for investors of any level.
When an investor invests blindly, the investment decision is typically influenced by the actions of his acquaintances, neighbours or relatives because they got too excited and fell into a herd mentality without realising it. However, this strategy is bound to backfire sooner or later, so investors should strictly avoid basing their decisions on someone else’s decisions!
Blindly following trends is probably one of the most common mistakes most investors make. When you see others getting handsome returns from the rising market, it is not unusual to follow in pursuit for a slice of the pie. The result can be catastrophic, because the more people buy into the trend, the higher the price gets pushed up, resulting in a buy that’s well above its true value.
Remember, investment trends always come and go. If you are chasing trends, how can you be certain that you are not the last to get off the bandwagon?
3. Waiting too long or failing to wait
Sometimes, the stocks you choose to invest in might end up becoming losers. These losing stocks must be dealt with in order to limit their impact on your overall investment performance.
Many make the mistake of holding on to their investments for too long, hoping that the stock will eventually rise again. However, this is akin to sweeping the dust under the carpet and pretending it’s not there.
Taking corrective action before your losses worsen is always a good strategy. In investing, avoiding losses entirely may not be possible; successful investors accept this and try to minimize their losses rather than avoid them.
Investing successfully requires you to find the right balance between being too risky and too conservative.
This is why experienced investors would always consider the potential loss of opportunity costs before making their investment decision.
To achieve your long term investment goals, you must strategise and plan ahead. Establish the right mindset and a realistic perspective in your investment strategy, and then stay focused and never stray from it. By diversifying your portfolio and remaining realistic and unemotional, sooner or later you will be able to build your wealth comfortably over time while minimising investment mistakes!