By Cam Goodwin
While it is important to have a proactive strategy to successfully navigate the markets, it is equally important to have an understanding of some of the fundamental pitfalls that investors can inadvertently stumble into. Here’s a quick rundown of five mistakes an investor can make to almost guarantee a poor return.
- Don’t try to time the market. In a global economy such as ours, there are too many unpredictable factors that can impact trends.
- Ignoring your asset allocation (i.e. how much you have in stocks vs. bonds and other assets) is another mistake. Studies have shown that 90% of your return is based on your portfolio’s asset allocation. The remaining 10% is derived from which stocks you own (stock picking), and the timing of when you bought them. While the financial media likes to report on the 10%, you should be paying closer attention to the bigger diversification picture.
- Hanging on to an investment for too long can also hinder your portfolio returns. If you have an investment that is not performing, waiting to sell it until you have made your money back could be like standing on the deck of a sinking ship waiting for a rescue that may never come — particularly if something has changed fundamentally in the original investment that you have made.
- Putting all of your eggs in one basket is the quickest way to a poor return. Consider bank stocks in 2007 or an energy stock such as Enron. If you had all of your investments heavily allocated in companies such as these, the repercussions were dire. Spread out your investments so you are not betting on a single entity or industry.
- Keep your emotions in check. It’s easy to get swept up in the frenzy of a thriving market. Be calculated in what you select and avoid overvalued investment opportunities that are based on a quick return or hype. Remember to keep the long-range plan in mind.