With volatile and uncertain capital markets as of late, prudent investing is more essential than ever. However, many investors have had a hard time keeping calm and staying on track with a financial plan in such an unstable market environment. In many scenarios, an investor’s emotions take over, leading to losses and costly mistakes. Below are five common investing mistakes that you should be avoiding.
#1: Getting Caught Up in Market Hype
While many stock market analysts and strategists provide valuable insight into the movement of the markets, they also tend to amplify both positive and negative sentiment among investors. As a result, relying on news media can stir investors’ emotions and make them act irrationally. Instead of focusing on the buildup of news during a volatile market period, investors should learn from seasoned veterans, who understand that remaining calm through market cycles is a normal part of the investing process. Likewise, it is important to remember market peaks and troughs are characterized by a large buildup of news that oftentimes causes investors to panic. For instance, the most negative information is oftentimes released during a market bottom, while the most positive news is touted at a market top. Rather than getting alarmed, investors should note market perceptions and use them as a clue to indicate the position.
#2: Investing for the Short-Term
Investors frequently gain confidence when the market is moving in their direction. Oftentimes, this leads them to attempt timing the market in the hopes of gaining a large return. Additionally, during periods of calmness, investors tend to overtrade in order to capture slight moves in various investment vehicles. Frequently, this approach leads to the accumulation of losses in a portfolio. It is important to remember that investing is a marathon, not a sprint, and that few get lucky enough to time the market correctly. As evidence of this fact, a study commissioned by Towneley Capital Management found that 95% of all market gains from 1963 to 1993 were a result of only the best 1.2% of the trading days within that period. With such odds, aggressive investors will not only lose capital, but will also suffer opportunity cost by holding capital and not being fully invested in the market. In other words, timing the market will only make you miss out on time in the market. In order to maximize returns, it is much more advantageous to invest for the long term and avoid needless overtrading.
#3: Ignoring Fees When Investing
Investing is not free. Although many investors do not think about fees due to their minimal effect in the short-term, these expenses can have a substantial impact on your portfolio over the long-term. It is important to note that expenses on long-term investments compound in the same fashion as returns, and that seemingly insignificant expenses can become material over time. In particular, investors should beware of annuities, which include surrender charges and large commission expenses, on top of general management fees. In order to minimize fees, an emphasis should be placed on reasonably priced mutual funds and ETFs (Exchange Traded Funds), which tend to sport lower expenses than many other investment options.
#4: Selling on Fear and Buying on Greed
During market swings, it is often challenging for investors to go along for the ride. This leads many individuals to “follow the herd” and get “slaughtered” by the market. As advised by veteran investor Warren Buffett, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Adhering to this advice, investors should avoid getting in or out of the market during the more volatile market periods. Instead, they should remember that market corrections are normal and that pressure should not be a key driver in any investment decision.
#5: Overweighting Your Portfolio
In many situations, market analysts tout certain investments over others. While good opportunities exist in the market, this should not be an open invitation to over-concentrate the holdings in a portfolio. When creating or modifying a portfolio, it is important to keep diversification in mind in order to lessen stock-specific risk. In addition, it is essential for investors to focus on creating a balanced portfolio, with broad exposure to domestic and global equities as well as fixed income markets, in order to maximize returns and minimize unsystematic market risk.
Of the many mistakes made by investors, the five mentioned here are repeat offenses. As capital markets continue to change and volatile periods materialize, these errors are likely to be repeated. Thus, any investor can greatly increase his/her chances of success by avoiding these typical blunders that threaten the health of your portfolio.