Investing can sometimes seem like hard work– cutting through the jargon, researching, and keeping to budget. And you can expect to win some and lose some along your financial journey; even the most seasoned investors do. But to give yourself a better shot at long-term success, you must avoid the following common portfolio pitfalls:
1. Not knowing when to walk away
Buying stuff is easy. Knowing when to sell is hard. Hence, it is essential to have a clear exit strategy for your investments, even before you buy. It helps prevent your emotions from standing in the way of your investment goals. When you “panic sell” during a market downturn or hold onto assets after you should have sold them, it can lead to the worst outcomes. Professional investors have five golden “sell” rules: they regularly evaluate the company’s health and price, set stop-loss points, examine if the original reason for buying still holds, and have a backup list of other potential investments.
2. Falling for confirmation bias
Believe it or not, we like others to agree with us. It’s no surprise that we tend to seek information that aligns with our investment choices and ignore the one that doesn’t. That’s what confirmation bias is all about. And it can be disastrous when paired with the Dunning-Kruger effect, a situation where folks who don’t know much about something start to think they’re experts. It’s a real headache during market bubbles; people ignore red flags and keep buying things that are too expensive because they feel they are right. The best way to avoid this bias is to actively seek opinions contradicting yours to understand both sides of the argument.
3. Being trapped in analysis paralysis
On the other end of the spectrum, some people feel they need to know everything before deciding, which keeps them from getting started on investing. However, there will always be unknowns in investing. Investing is about taking smart risks and accepting that you can’t know everything. It’s a mix of science and art; you collect data and crunch numbers, but you must trust your gut sometimes. Needing to know everything before you take the plunge could mean losing out on an investment opportunity. You also have to know when to leap with the info you have. Sometimes, the best move is realising that it’s okay to make mistakes and learn as you go. It’s all part of the journey.
4. Performance chasing
It’s hard to admit, but many are guilty of this one. We love checking out a stock’s price chart and seeing how it compares to its history and the market. Knowing when a stock you like has recently outperformed the market with a strong price performance is reassuring. However, you’re not alone; most regular investors tend to pick funds based on how well they’ve done recently, compared to their benchmarks, thinking these funds will keep doing great. But the best-performing assets don’t always stay on top.
Just because a stock or fund killed it in the past doesn’t mean it’ll keep doing the same. Focusing too much on the short-term feeds the urge to chase performance, which can hurt your long-term gains. So, before investing, take time to understand what’s driven a stock’s past performance and evaluate whether that can continue.
5. Obsessing about the negative
Loss aversion is real. The pain of losing can be psychologically as powerful as the pleasure of gaining, which is why we fixate on bad news and worry that the markets will fall. There will always be bad news and things to fret about, like pandemics, political upheavals, and disruptions. But you’ll miss out if you try to time the market or wait until the bad news has passed. Markets tend to bounce back more quickly than we expect. Hence, it’s usually best to wait out whatever’s happening. After all, it’s time in the market that counts, not timing the market.
6. Thinking that more investing equals more diversification
Diversifying your investments is like having a safety net for your money; it lowers the risks of a loss. But you won’t achieve it simply by having a bunch of different stocks. What really matters is the kind of stocks you have. A portfolio with 15 different US tech stocks won’t have as safe a net as one with 15 stocks from several sectors or one spread across different countries and asset classes. To be truly diversified, you must hold assets that respond differently to varying market environments.
In conclusion, you can significantly increase your chances of achieving your financial goals by avoiding these pitfalls; remember that investment success often comes from a disciplined, long-term approach. If you’re looking for a platform to help you navigate the investing world and avoid these pitfalls, consider using Risevest. We provide a user-friendly interface, expert guidance, and diversified investment options to help you build a strong investment portfolio.