Behavioral Investing

Common Investment Pitfalls and How to Avoid Them

By Anushreya Kondapi

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Financial markets are rarely easy to navigate alone, and when you add in economic factors, complex political & global developments with devastating weather events, it can seem even more challenging.

When emotions cloud your judgment, poor investment decisions often follow. A long-term investment focus can help when emotions run high. While balancing ongoing changes can seem daunting, a steady course can help buffer you against turbulence and uncertainty!

To help you overcome these challenges, here is a compiled list of common mistakes and guidelines.

1. Believing Investing is a Smooth Ride

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Even though the stock markets have performed well overall, investors need to remember that nothing lasts forever. However, they may still find opportunities to grow their money in a choppy market. Preparing for declines is essential. The desire to pull out of the markets when they tumble can derail long-term goals. Instead of retreating during turbulence, you may need to adjust your investment mix. By remaining flexible, you may take advantage of opportunities to act on underpriced assets, manage risk, and increase return potential.

2. Trying to Time the Market

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When markets rally or pull back, seeking out the top to sell or the bottom to buy may seem tempting. The problem, however, is that investors usually guess wrong, potentially missing out on the best market plays.

When people invest on the high and pull out on the low, they may miss opportunities by not remaining patient. The problem is that equity gains can often be made in a very short amount of time. If you are not in the market when it moves, you may miss out on the whole play.

3. Taking Too Much Risk

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Another mistake is having too much risk in your portfolio. Risk involves the chance that the investment you choose will perform differently than you anticipate.

Portfolio risk can be insidious. Holding a diverse mix of stocks, bonds, and alternatives may seem adequate for managing risk, but it’s just one component. The objective is to take on the amount of risk that still aligns you with your long-term goals

4. Taking Too Little Risk

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Playing the market cautiously and taking on too little risk may also negatively affect your portfolio. While minimal risk can feel like a safe move, you could miss important market rallies.

A variety of factors may be causing investors to act more cautiously, including ongoing global uncertainties and fears from market highs. While equities can have greater loss potential than short-term, fixed-rate investments, they also can have a greater potential for gain.

5. Making Emotional Investment Decisions

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When markets swing, emotional decision-making can wreak havoc on the most carefully designed investment strategies.

Fear and greed can easily drive our financial decisions. Fear can cause us to abandon an investment strategy when the outcome is not what we want. Greed can cause us to chase investment fads and take on too much risk. As you invest, you can support your long-term strategies by avoiding these emotion-based decisions.

6. Focusing More On Returns Than Managing Risk

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Many investors make a big error by chasing performance. Buying an investment due to its past performance is not a reliable way to predict future winners.

Often, by the time the average investor decides to invest, experienced investors have already rebalanced. Meanwhile, the not-so-savvy money continues to pour in beyond the investment’s prime.

Stick to your strategy, rebalance, and focus on investments with great fundamentals rather than chasing returns.

7. Avoiding Professional Advice

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Being unaware of your own mistakes can lead to a detrimental investment experience.

Successful long-term investing requires the ability to position and rebalance your portfolio to ride bear and bull markets. This level of complexity can make working with an investment representative critical to your ability to meet your goals.

There are many ways to avoid these pitfalls.

1. Don’t rush into an investment

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When investing, there is no such thing as the one big opportunity. So don’t ever feel you have to jump on an opportunity now to make a profit. Successful investing needs to be carried out over time. Patience is a needed virtue.

2. Focus on percentages

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A common mistake that many investors make is to look at the dollar amount their account has lost or gained each month, rather than at the percentage change.

3. Keep your ego aside

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Often investors let their pride get in the way of making sound investment decisions, particularly when they are dealing with a salesperson who is well-trained in appealing to investors’ egos to make a sale.

4. Don’t try to make up for lost time with aggressive investing

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Falling behind on one’s long-term investment goals can certainly be a cause for concern. But you don’t want to compound the problem by adjusting your investment strategy inappropriately to try to make up for the lost time.

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