5 Common Investment Mistakes
When we let our emotions guide our investment decisions we will inevitably fall into any number of investment traps that can have devastating consequences on long-term returns. Fear and greed are the biggest culprits and are generally responsible for many of the investment mistakes people make. Here are some big ones:
Investing too conservatively - Investing in safe or guaranteed instruments may provide peace of mind that you won’t lose any money due to market fluctuations; however, each day that your returns fail to exceed the rate of inflation, you are, in effect, losing money, and that loss becomes more pronounced over time.
Over-diversifying – Most investors have been taught that diversification is the key to reducing risk and volatility in a portfolio. But there is a danger in over-diversification which can reduce your overall return without reducing risk or volatility. Fear of risk can lead investors to try to “diversify” away risk completely, but it can’t be done. Better to understand how risk and returns are related seek optimum diversification for your specific objectives and risk tolerance.
Under-diversification – This can occur when investors “fall in love” with a particular stock or mutual fund and begin to allocate too much in one direction. This will, of course, increase your risk exposure as well as the volatility of your portfolio. It can also occur when investors purchase too many mutual funds that all invest in the same stocks.
Investing without a plan - Investors who adhere to a plan with clearly defined objectives and a tailored investment strategy outperform those who don’t. A well-conceived investment strategy is what keeps investors from falling into investment traps such as chasing returns or trying to time the markets.
