I personally have made many foolish mistakes when it comes to investing. Just like any investor, mistakes are learned and hopefully not repeated. Here are 5 common investor mistakes which we should all look out for.
1) No proper investment plan
Before embarking on any journey, it is always wise to chart out the path which should be taken. Have a plan that addresses the following.
- Define your investment goals and objectives: What are you trying to achieve? Define them with a definite number and timeframe. To save up $50,000 in 15 years for your child’s university fund is a defined goal. Wanting to be rich is not.
- Understand your risk appetite: Are you a risk taker? Can you stomach volatility in the market?
- Determine your investment horizon: If you are in your mid-20s and want to save up for your retirement then you have a long horizon and can perhaps look at investments with a very long time frame. If you are a 55-year-old and are about to retire in 5 years time, perhaps you should not be taking on too much risk if you need the monies for your retirement.
- Asset Allocation: Your money is a finite amount. Determine how much you will place in various asset classes like Singapore stocks, overseas stocks, bonds, etc…
- Diversification: Similar to asset allocation, you will need to make sure that you diversify within each asset class. Like for example, investing in equities should be a good mix of companies from various sectors as well as small, mid and large-cap stocks.
Having a good plan and sticking to it is key to generating consistent returns. It is easy to waiver from your investment plan especially when the market is exuberant. If you do not have a proper investment plan or are not sticking to one, you are charting a rather dangerous path.
2) Too short of a time horizon
If you are investing for your retirement, then you should not worry about market volatility in the short run. Instead, you should be thinking whether the company whose stock you are holding is relevant in the long run. Many investors are preoccupied with what the market is going to be like in a years time. There are some that are still obsessing over what the market did for the past year!
Look at investing in terms of what you want to achieve. Always use money that you are squirrelling away for your long term goal and not money that you need for your daily needs. If you cannot set aside that money to be invested for the very long term (more than 10 years), then perhaps you should not be thinking of investing that money at all.
3) Failure to ignore noise in the media
Many investors place too much emphasis over what analysts say over a certain stock. They then fret about it and discuss it over and over again. At times even abandoning their investment plan because of a report. Investors must remember that the media needs to churn out news and your stock broker profits on your activity. The more you trade, the richer your stock broker becomes because he earns a commission. Sites like Bloomberg and CNBC are not going to tell you that everything was the same as yesterday. They need to churn out news to their viewers and readers. Focus on important events like maybe a new regulation which will hurt banks. Do not focus on the short-term fluctuations in a particular banking stock. Prices go up and down because of an analyst commenting on it. If analysts were that accurate, they would be making millions of dollars buying stocks rather than sitting in their office churning out reports. (Coincidentally, this applies to the property market as well.)
4) Not rebalancing your portfolio
It sounds counter intuitive but as times you have to shift money out of the performing asset into an asset that is growing slower. For example, if you planned to have a portfolio with 60% equities, 30% bonds and 10% cash, equities may have gone on a super bull run and your portfolio may look something like 75% equities, 20% bonds and 5% cash. You would then have to sell some equities, bringing the percentage down to 60% again and of course rebalancing the rest back to 30% bonds and 10% cash. This discipline is often ignored especially in a bull market. This balancing act ensures that you are not too overweight on a certain asset in case of a sudden turn in the market.
5) Chasing performance
This is perhaps the mistake which most investors make. The feeling that you are missing out on a bull market and that you are looking to get in some time. All the fundamentals look sketchy but because of a huge upswing in a certain stock price, you think that the market should continue in that vein of form. Please remember, if you think you should have invested “last time” then let’s forget about it. Put it aside and move on. Think of whether the market will continue from today. Do not make the mistake of placing silly money into the market just when the smart money is coming out.
Well, all these factors should be kept at the back of investors’ minds when they invest. I do hope that this article is of use to most investors out there. The market is on perhaps the largest bull run in modern history and investors should tread cautiously now that the markets are sitting at all-time highs.