Author: Marissa Hayden
It's surprising how common bad investment habits are, and how easily they can be avoided. Are you making these potentially costly mistakes?
1) Not thinking long-term
Investing shouldn't be thought of as a get-rich-quick scheme, more often than not it's a long-term process. And while you may have to be patient before you reap the rewards, often by taking the long-term approach the rewards are greater.
One of the biggest advantages of investing long term is the potential to make substantial gains through compound interest. The interest you earn on your principal amount is reinvested into your principal.
As your principal continues to grow, this in turn increases the interest that you earn. Also, generally, the longer you are in the market the more earning potential you will have, so it's never too early to start investing.
2) Don't follow the herd
A mistake that is often made, even by experienced investors, is getting caught up in the hype and blindly following the latest trend.
Following the herd can often mean neglecting your investment strategy and jumping into an investment without doing adequate research. Some may think there is safety in numbers, but this is not always the case.
3) Not sticking with your plan, or not having one to begin with
Before investing your money, it's always best to have a strategy. It should take into account your investment goals, personal circumstances and tolerance for risk.
A well thought out investment strategy can help keep you focused and your eye on the prize. It can also help you avoid costly mistakes that deviate from your investment plan.
4) Relying on past performance
Touted but not often taken seriously is the saying: past performance is not a reliable indicator of future performance. You'll see it tacked on to investment related content, and for good reason, it's true.
It's easy to get excited when a particular stock or fund has been consistently performing well, but it doesn't mean it will continue on the same trajectory. It's best to take a step back and thoroughly research a company or fund before investing.
5) Buying high and selling low
When the market takes a tumble, some investors see this as their cue to sell their shares and, as a result, some may exit the market at a loss. And when the market lifts again they jump back in and buy more shares.
Generally, buying and holding on to an investment can be a better tactic, giving the asset time to recover and weather the storm. Instead of buying high and selling low, you should aim for buying low and selling high.
6) Trying to time the market
Timing the market is trying to predict when the stock market will crash and when it will rise. It's only recommended if you are Marty McFly and have a time-travelling DeLorean, otherwise it's typically considered impossible.
Often, when using this tactic, your emotions get the better of you and you're more likely to be wrong than right. As they say, it's all about time in the market not timing the market.
7) Not having a diversified portfolio
Having a diversified portfolio can help protect you from risk. If you're only invested in shares, for example, and the share market takes a tumble, the value of your investment will likely fall.
If your portfolio is spread across different assets, it's likely that you'll be more sheltered from a downturn. If your strategy is to invest in growth assets, such as stocks, and you're comfortable with the risks, you may want to consider spreading your investments across different sectors and even across different countries.
8) Not rebalancing your portfolio
Rebalancing means adjusting your investment portfolio (through buying and selling certain securities) to maintain your set asset allocation. It's important to maintain your asset allocation, because it keeps your tolerance for risk at the most comfortable level.
For example, let's say your asset allocation is 60% stocks and 40% bonds. If stock prices go up for a few months, your allocation might rise to 70%. That means you have to sell some stocks to get back to your ideal asset allocation. For most investors, rebalancing twice a year is often sufficient.
9) Checking your investments too regularly
This can be a difficult habit to break, but it's an important one to stop, particularly if you are investing long term. Not checking your investments regularly should help you leave your emotions at the door. After all, the share market can be volatile, and if you react to every market movement, you'll probably find investing too stressful and time-consuming.
10) Not doing your research
If you only break one bad habit then let it be this one. Before making an investment, it's important to thoroughly research and understand what you're investing in. Take the time to properly read the key paperwork, like annual reports.
Bear in mind, fund managers and companies will always try to put their best foot forward, and it might require you to read between the lines.
It's also worth applying some fundamental and technical analysis before making a decision. Keeping up-to-date with investment news may also be helpful, as a good investment today may turn out to be a bad one tomorrow.