When it comes to investing, ultimately your primary objectives are to beat inflation, and make money in the process. On paper, this all sounds very simple and straightforward, but the reality of investing is anything but.
While it’s easier than ever to get started with investing nowadays, that doesn’t make the art of investing any easier. In fact, many would argue that it’s tougher than ever. To begin with, you need to decide what to invest your money in. You can invest in things like wine, whiskey, gold, silver, and even art. When most people think of investing, though, they think of stocks and shares, which is what we’re focusing on today.
While you can invest in individual stocks and shares, to help maximize your potential gains, and mitigate against loss and market turbulence, it’s recommended that you build an investment portfolio. This is basically a collection of different investments. Rather than investing all your money in one company, an investment portfolio allows you to invest in several different ones instead.
To help boost your returns and lessen your losses, smart portfolio management is vital. Here are some common mistakes to avoid.
Failing to Diversify
Read any article or blog talking about rookie mistakes made in investing, and 99% of the time this will be one of the first mistakes listed. The reason, very simply, is because it’s such an important mistake to avoid.
When building an investment portfolio, it can be tempting to put all your metaphorical eggs into the same basket, and keep your investments similar to one another. Tech stocks on the NASDAQ for example, have done extremely well in recent years, so naturally it can be tempting to build a tech-heavy investment portfolio. That’s all well and good, but what happens when tech stocks take a hammering? Your entire investment will fall and there will be nothing to offset the losses.
By diversifying your portfolio, you’re helping to protect against future losses and market instability. By investing in different companies working in different sectors and markets, this means you’re less likely to experience steep drops all at once. If for example, tech stocks are tanking, but emerging markets are on a Bull Run, any emerging market stocks in your portfolio will yield growth and mitigate losses in other sectors of the market.
Having Favourites
Investing is somewhat like parenting, in the sense that you can never have favorites.
Another common mistake we tend to see when it comes to investment and portfolio management, is people having favorite stocks and being loyal to said stocks.
Sure, it’s great to include stocks with proven track records in your portfolio, but if you’re including a stock just because you like the company, or because the stock itself was good to you in the past but has been very up and down recently, that isn’t good investment practice.
Whether the stock has performed well in the past, you believe there’s a chance it could grow in the future, or even if you just like the company, in investing you need to be willing to cut ties with stocks and adopt a disciplined attitude.
Basically, don’t let your heart rule your head and look at each investment individually from a neutral, unbiased perspective.
Attempting to Time the Market
In investing, there’s a common debate in which people look at ‘time in the market’ vs ‘timing the market’.
Generally, most financial experts agree that time in the market is better than trying to time the market. When people try to time the market, they’ll invest at a point when they think things have bottomed out. The basic premise is to buy when stocks have fallen as much as they can, and then wait for them to grow and cash in.
On paper it’s a sound strategy, but the problem is that nobody knows what is going to happen in the markets. All it takes is one headline or announcement and markets can crash in a matter of minutes. Just because you think the markets have fallen as much as they can, that doesn’t make it so.
Instead, look at long-term investing for sustainable growth, which is where time in the market comes from.
Not Wanting to Sell at a Loss
As an investor, red is a color you generally never want to see. As far as you’re concerned, it should be green across the board. Unfortunately, that isn’t how investing works. While red days are generally not a good thing, they are somewhat essential for the markets. That doesn’t make them any less painful for investors, though.
When it comes to cashing in your investments, generally you want to sell when you’re in the green, as that means you’re making a profit. Sometimes, however, it’s necessary to sell in the red, at a loss, and people need to realize that.
If one of your assets falls, even below the price you paid, you need to be willing to sell at a loss in some instances. Sometimes selling at a loss can be beneficial, as it can help to avoid further losses. Far too many people are hesitant to sell at a loss and hold onto assets in the hopes of them recovering. Unfortunately, that doesn’t always happen. Sometimes share prices keep falling and falling and never recover.
Selling at a loss may seem counterintuitive, but it can help you to avoid sharper losses, and you can always re-invest the money elsewhere.
Trying to Offset Losses
No investor ever wants to sell at a loss, but for the vast majority, it will happen at some point. It’s simply the nature of the beast.
One of the most common mistakes people make when trying to manage their investment portfolios, however, is trying to offset losses with what is being dubbed ‘revenge trading’. This is basically where investors will get emotional and will take risks in the hope of offsetting their losses.
Emotional investors chasing losses have been known to invest in high-risk stocks in the hopes of making healthy returns quickly. The problem is that high-risk stocks are high-risk for a reason, and if they drop, they tend to drop sharply.
Sometimes it’s better to take a small loss, step away, look at why it happened, and do what you can to prevent it from happening again.
*Disclaimer* This is not financial advice. If you’re seeking financial advice, speak to a professional. Never invest more than you can afford to lose, and understand that investments can go down as well as up.