Whether it’s learning to invest or doing something else, you may not be doing it the right way. Here are some common mistakes to avoid.
Do not “shop around” to find a counselor
New investors often use the same advisor as their parent, friend, family member, etc. However, the best advisor for someone else may not be the best for you. Before choosing an advisor, consider your needs and observe the types of clients the advisers work with to decide how much you want to participate in the investment decision.
Before choosing a counselor, ask yourself these eight questions.
Understand how investments work
Research investments before making a decision. This is an important step to:
- Understand the risks associated with the investment, including potential losses or returns.
- Examine how the investment fits into your existing portfolio.
- Understand the fees you pay and any penalties for early withdrawal.
Invest in something “trendy”
Some investments become popular in the media because a celebrity supports them, or they might be new to the market. Friends can also recommend placements that they have chosen for themselves. While it may be tempting and reassuring to follow the decisions of a large group of individuals, retail investors should be cautious about participating in this kind of “sheep behavior.”
Do not have a plan
Establishing a plan will help you reach your financial goals. Determine a specific interval to review your investment plan and make sure you change your plan if your financial goals (the reasons you are investing) have changed. A plan will also help you choose the asset allocation that fits your short- and long-term goals.
Your plan should be specific and realistic and provide information on your risk tolerance in your investment strategy.
Do not pay attention to expenses
It is important to understand the costs when you invest because they reduce your yield. Ask questions before investing and evaluate your options. For example, two investments may involve risks and an expected return. Expected similar, but the expenses of one of them may be higher; other things being equal, the fees would affect your performance. See how fees can affect your return over time using our Portfolio Expense Calculator.
Have an overconfidence
Many investors overestimate their ability to “outperform the market” by trading frequently, thereby yielding less than they would have earned by simply holding a wide range of investments.
Our overconfidence can be compounded by the way we interpret new information – we tend to examine this information in a way that confirms our previous beliefs. As a result, in a bull where the investments generally have a good return, we could decide that operations give us a higher return. However, in a bear where investments have a bad return, we are going to blame the market and keep our belief that we are still good operators.
Seeking performance
Past performance is not an indication of future performance. This is an important lesson for both new and experienced investors. If an investment made a good return last year, it might offer a worse one this year.
Look for investments that fit well with your level of risk.
Do not capitalize a return
You can grow the money you save by investing it to earn a return. Your money will grow faster if you also invest the money you earn (your return) in addition to the money you started investing with. This is Capitalization. Capitalization works for both guaranteed and unsecured investments.
Not reinvesting the money you have earned can limit your ability to grow savings faster and reach your financial goals.
Do not read account statements
You should receive account statements monthly or quarterly that show your account activity and provide you with an update on your investments. You can receive the statements by mail or view them online. When you receive your statements:
- Make sure the investments bought and sold are accurate.
- Make sure the fees and commissions are accurate.
- Check how much your investment gains or losses are.
Contact your financial representative if an item in your statements is unclear or seems inaccurate.
Not seeking diversification
Diversification (Holding investments in various asset classes, sectors, and geographies) can help you reduce the overall risk of your portfolio. Here are some reasons to diversify:
- All types of investments do not perform well at the same time.
- The different types of investments do not all react in the same way to global events and changes in economic factors, such as interest rates and exchange rates, and inflation rates.
- Diversification allows you to build a portfolio with lower risk than the combined risks of individual stocks.
If your portfolio is not diversified, it will be unnecessarily exposed to risk. You will not benefit from a higher average return by accepting the unnecessary risk.
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