5 Common Investment Mistakes

When investment mistakes happen, money is lost. Mistakes can occur for a variety of reasons, but they can generally be attributed to the clouding of the investor’s judgment by the influence of emotions, the misunderstanding of basic investment principles, or misconceptions about how securities react to varying economic, political, and fear-driven circumstances. The investor should always keep a calm, cool and rational head, and avoid these common investment mistakes:

  • Not having a clearly-defined investment plan. A well-conceived investment plan does not need frequent adjustments, and a well-managed plan is not susceptible to the introduction of trendy speculations and “hot picks”. Investment decisions should be made with that investment plan in mind. Investing is a goal-orientated activity that should include considerations of time, risk-tolerance, and future income. The prudent investor should ponder carefully the direction of his or her decision before actually moving in that direction.
  • Investors become bored with their plan or the rate of gradual growth too quickly, change direction frequently, and make drastic rather than measured adjustments. Investing should always be regarded as a long-term proposition, and the mindset of the savvy investor should reflect that.
  • Investors tend to fall in love with securities that rise in price and forget to take their profits, particularly if the company was once their employer. One must not become so blinded to the beauty of unrealized gain that he or she forgets the “whys” and “hows” of prudent investing. Aside from the love issue, this often becomes an “unwilling-to-pay-the-taxes” problem that could very well manifest itself on the tax return as a realized loss. The rules of diversification must always be adhered to.
  • Investors often overdose themselves on information, causing a constant state of "the paralysis of analysis". Such investors are likely to be confused and tend to become indecisive. Neither of these characteristics spells health for an investment portfolio. Compounding this issue is the inability to distinguish between research and sales materials, which can quite often be the same document. A somewhat narrow focus on information which supports a logical and well-documented investment strategy is a much more productive means of fact-finding.
  • Investors are constantly in search of a shortcut or gimmick that will provide instant success with a minimum of effort; i.e. the “get-rich-quick pick”. Consequently, they initiate a feeding frenzy for every new product or service that comes along. Their portfolios become a hodgepodge of Mutual Funds, Index Funds, partnerships, penny stocks, hedge funds, commodities, options, etc. This obsession with Product simply shows how Wall Street has made it impossible for financial professionals to survive without them. But the prudent investor always remembers: consumers buy Products; investors by Securities.

Investing has become a very competitive event for investors, although it certainly should not be. Investing is a personal venture where individual and familial goals and objectives should dictate one’s portfolio structure, management strategy, and performance evaluation techniques. It is difficult enough to manage a portfolio in an environment that encourages instant gratification, supports unfounded and unwarranted speculation, and applauds shortsighted goals and achievements.

blog comments powered by Disqus
Scottrade