The super investor Warren Buffet once conceded that the biggest mistake in his investment career was not picking up additional stocks of Wal-Mart (NYSE: WMT) during the 1980s. The only reason he did not pick up extra stocks of the shopping store that would later on became the behemoth of corporate world was because he felt the stock price wouldn’t appreciate enough. That mistake cost him $10 billion in potential profits later on.
In other words, the investment guru let his emotions make the decision for him that resulted in the billion-dollar investment blunder. This shows that even seemingly flawless investors sometimes make unwise investment decisions. Ordinary investors tend to make even greater mistakes when it comes to investing their precious money.
It is true that there are no hard and fast rules about avoiding losses or maximizing earning potential of the investment. A certain amount of risk is inherent in ever investment decisions. Yet, there are certain mistakes that you should avoid at all costs to ensure that the invested money remains safe and secure. Here are 10 common mistakes that you need to guard against while making investment decisions.
10. Putting All Your Investments in One Basket
The most common and yet the most dangerous mistake when investing is not diversifying your investment. Diversification is the foundation of a good portfolio management strategy. The investment amount should be spread out over different investment avenues. An ideal investment portfolio contains different types of financial instruments, not all of which move in the same direction. Having a portfolio of dissimilar investment instruments will protect the investment in case of adverse market conditions.
9. Wrong Timing of Investment
Another mistake that you should avoid pertains to wrong timing of the investment. Timing is the key for successful outcome of any investment. For this, you should know the difference between actual and inherent value of the investment instrument. The ideal time to buy is when the inherent value is significantly greater than its market or actual value. Contrarily, the best time to sell any investment instrument is when it has appreciated enough to give you respectable returns on the investment.
8. Setting Too Much or Too Little Equity Exposure Limit
Equity market is subjected to extreme volatility in prices. The biggest mistake when investing in the equity market is setting too little or too much equity exposure limit. Too little exposure means losing out on the opportunity of earning greater profits by early withdrawal of the investment amount. On the other hand, too much exposure means holding out to the investment even when it is incurring losses.
You should avoid exposing your investment for too long during a downtrend and bail out early. Similarly, you should avoid taking out your money too early during an uptrend to maximize earning potential of your investment.
7. Allowing Emotions to Overrule the Investment Decisions
A number of investors tend to make investment decisions based on their gut feelings. Yet this is the last thing you should do when investing in any financial avenue. The example quoted at the beginning of the article shows how emotions lead to making unwise investment decisions. You should aspire to make every investment decision after thorough research of the underlying investment option.
6. Taking Too Much Investment Risk
Taking too much risk is another mistake that you should avoid when investing. You should stay away from high-risk funds that have little return potential. For instance, it makes no sense in investing in companies that are facing bankruptcy. You should choose to play safe and invest in only those companies that have sound financial position with great future earning potential.
5. Not Reinvesting the Proceeds
A big mistake investors make is to not reinvest the proceeds into other financial avenues. Reinvesting the proceeds in another stock will help you diversify your investment portfolio. It is one of the ways to enhance the earning potential of you overall investment.
4. Taking No Consideration of Investment and Transaction Fees
Most investors focus so much on price and return potential of an investment instrument that they tend to overlook investment and transaction fee. But these costs impact the amount of return that you receive from the investment. You should ensure that the investment fee and charges are not so high to make it difficult for you to earn a respectable income from your investment.
3. Investing for the Short Term Duration
You should keep your investment horizon to a minimum of two to five years duration. You should consider bailing out your investment only if the market goes contrary to your expectations during that duration. Remember that there are no shortcuts when investing in the financial market. Reacting to every bump and lump in the market will not allow you to earn respectable returns from your investment.
2. Not Holding on to Winning Stocks
Not holding to winning stocks is another common mistake made by some investors. They sell their winning stocks too quickly; thus losing out on the potential of earning greater returns. Most often the winning stocks will continue to give higher returns while the loosing stock will continue to give negative returns over a specified duration.
1. Making Investment Decisions on Agent’s Recommendation
Finally, a lot of people make the mistake of blindly following their agents’ recommendation when investing. You should know that sometimes the agents have to take care of their own interests when making recommendations. It is necessary that you do your own research before investing in any financial instrument to confirm about the agents’ recommendation.
In the end, it can be said that successful investment decision hinges on using your common sense to avoid the prospect of losses. There are no successful strategies when investing in any market. You just need to avoid making bad investment choices and let your money do the work for you.