One of the ways that you can build wealth, and live a little more abundantly is to invest. Investing can provide a way for you to put your money to work on your behalf. While there are risks involved in investing, and the possibility of loss, you can reduce some of that chance of loss by avoiding some of the more common investing mistakes.
As you consider investing, and how to build a portfolio that works for your situation, here are some common mistakes to avoid:
1. Panicking with the Crowd
It’s easy to get scared and panic — especially when everyone else is doing it. However, you need to be careful about when you sell investments. While there are some very good reasons to sell a stock, it’s rarely a good idea to sell a stock just because everyone is in panic mode.
Instead, take a step back and look at the big picture. Are assets losing ground because the whole market is tanking? If so, you might not want to pull the trigger too quickly. Instead, consider the fundamentals. If the fundamentals are still solid, there is a good chance that your assets will recover in time.
2. Trading Too Often
This can be tied with panicking, but it can also be its own problem. Too many of us get caught up in to day to day movements, and think that we need to trade a lot. While there are day traders who manage to make good money on regular market movements, it’s important to realize that these traders are dedicated to what they do.
Most of us regular folks are better off trading at wider intervals, or employing a dollar cost averaging strategy. Trading too often can cost you in terms of transaction fees, and there is a bigger chance that you will lose out.
3. Lack of Diversity
If you want to reduce the overall risk of your portfolio, you need to remember to diversify to some degree. You need to make sure that your investments are diversified in terms of asset class, as well as across different sectors and industries. It also doesn’t hurt to diversify geographically and include investments from other countries. Avoid investing heavily in your company’s stock.
It’s fairly easy to start investing, and to diversify. There are index funds and ETFs that allow you to diversify easily, while at the same time helping you avoid some of the bigger risks that can come with investing.
4. Failure to Understand What You’re Investing In
One of the reasons it’s good to start with stocks and bonds, and investments that are based on them (like index funds and ETFs), is because they are fairly easy to understand. You shouldn’t invest in things that you don’t understand. Take a few minutes to learn how different asset classes are traded, and how different investments work. It is also worth to learn what factors influence different investments. Get a handle on how different investments work, and you will be far more likely to find success and avoid some of the pitfalls that bring down investors.
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Number 4 should be number 1. Understanding a company or Industry is the smartest way to minimize risk.
Number 4 is important for sure. It’s clear that you have to know what you’re investing in. It’s less clear though (to me at least) when you actually reach that point of knowing well enough what you’re investing in. I can take a few minutes’ and find out the basics about stocks, but if someone would test even this basic understanding, I’m sure I would fail. Same for understanding the fundamentals of whatever industry you’re investing in. You can spend a day finding out everything about it, but most industries are pretty complicated and interconnected, so that you won’t get the total picture after just this one day (or after a year, for that matter).