Everyone makes mistakes, especially when it comes to investing. That’s just part of being human. Fortunately, everyone is capable of learning from mistakes.
Here are the seven greatest investment mistakes that new and even seasoned investors often make. Learn from them now, and you can prevent them from costing you in the future.
- Under-diversification. Some people tend to place all their money in one type of investment, such as technology stocks. They think that because they own stock in several technology companies, they are well diversified. But diversification means balancing a combination of stocks, bonds, and cash reserves. By spreading your assets out over a wide range of investment opportunities, you allow yourself the ability to ride out market fluctuations. The goal is to avoid losses from some investments by offsetting gains from others.
- Over-diversification. Although diversification is a fundamental of smart investing, too much diversity can limit returns. First, it can cause your portfolio to perform the same way as the market, which limits your flexibility in a market that goes down. For example, if you have $100,000 in 50 stocks and $100,000 in six stocks, you’ll get more cash by selling one of the six rather than one of the 50.Second, a wise investor keeps close tabs on the companies he or she invests in. The more companies you invest in, the more difficult it becomes to monitor their activities. And this increases your chances of missing potential losses.
- Overconfidence. Overconfidence in financial matters can lead to acquiring too much risk and ignoring fundamental investment strategies. Overconfident investors tend to play the stock market with excessive buying and selling, which can lead to large losses. And they often believe they can choose investments better than they really can. An overconfident investor doesn’t have a realistic grasp on the way the financial world works.
- Panic. Fear and panic are natural human emotions. They often strike investors during uncertain political or economic periods, such as a war or major election. These situations cause people to believe that they might lose everything if they don’t sell. But financial decisions made in a state of panic can result in serious, unrecoverable losses. Resist the temptation to make big decisions in such an emotional state.
- Speculation. Speculating and investing are two different things. “Investing” means wise, well-researched financial decisions that will finance long-term goals, such as retirement or education. “Speculation” means taking on huge risk in hopes of making significant gains. Can you see the difference? If you think investing and speculating mean the same thing, you may suffer great losses when your assets don’t mature the way you had speculated and hoped.
- Market timing. Time, not timing, allows an investment to appreciate. Those who try to invest only at the most opportune times run the risk of missing periods when the highest results are achieved. Not even the experts can predict market highs and lows. However, adopting a long-term perspective may allow many investments to “ride out” more volatile periods.
- Cost basis decisions. Many investors who’ve experienced a significant gain hesitate to sell their assets to avoid risk because they don’t want to pay capital gains taxes. They feel too comfortable with their progress and don’t want the expense. On the other hand, some who’ve experienced losses avoid selling until they at least break even. In either situation, the important thing to keep in mind is that when your portfolio needs an upgrade, then cost shouldn’t influence your decision.Mistakes are an unavoidable part of life. But if you know what to look for, you may be able to avoid a big one. When you avoid these seven investment mistakes, you help ensure the security of your financial portfolio and your future. Vistage Trusted Advisor Chad Coe is president of Coe Financial Group, based in Deerfield, Ill.