Filing your taxes can be complex, but not everyone needs a CPA. Similarly, the stock market might seem complicated, but not everyone needs a financial advisor or investment firm to manage their portfolio. Some people have the right temperament and effective strategy to successfully navigate the stock market.
However, if you do manage your own investments, here are three costly mistakes you may be committing, which you should avoid:
1) Getting Too Emotional
Investor behavior is everything. Although easier said than done, maintaining a level-head is crucial when making investment decisions. Depending on how actively you monitor your portfolio, witnessing the market’s up and down nature will produce both euphoria and fear, and everything in between. For many, those feelings can be difficult to manage, which often leads to impulsive buying and selling decisions. As an example, an investor might fall victim to buying at market tops because their optimism is running high. Conversely, an investor might start panic-selling at market lows, out of an overwhelming sense of fear. Depending on your frame-of-mind on any given day, your mental state could easily cloud your decision-making.
2) Taking On Too Much Risk
You know yourself best, right? Well, be careful as it relates to how much risk your portfolio is actually taking. Just because you “think” certain investments are the right ones does not necessarily mean they are suitable for you. Some investors solely focus on achieving higher returns, while overlooking the fact that you have to take on a significant amount of risk to achieve those higher returns. When the market rises, investors feel like they can take on more risk. But what happens when the market dives? How would you feel if your portfolio lost 10%… 15%… or even 20%? At what point do you start feeling uncomfortable by doing nothing (i.e. reducing a position or outright selling it)? Although a full evaluation of your financial situation is the best way to determine how aggressive you should be, considering “what if” scenarios like the one mentioned here can help gauge how much loss you are willing to stomach.
3) Listening To Others
Before investing your capital, it is natural to research different ideas, ask questions and consider various methods. Like other decisions in life, it is normal to look around before reaching a conclusion. However, not every idea is a good idea, which means not every investment idea is right for your portfolio. Before you pursue that tempting new stock tip from a friend, I encourage you to step back and consider the source. Take a minute to evaluate the person giving you advice and make sure there is evidence behind their suggestion. This includes news outlets too. Too often, people forget that media headlines are intended to attract an audience, for purposes of ratings and advertising sales. Bottom line: Be critical of who you take advice from and make sure any such advice applies to your unique situation.
