What do investing and tennis have in common? We could probably come up with a few similarities, but avoiding unforced errors has to be top of the list. In other words, while you can’t control what the market (or your opponent) does, you can do your best to ensure you don’t make avoidable mistakes with your own decisions.
With this in mind, here are some common investing errors to avoid:
Lack of Attention to Proper Asset Allocation
When was the last time someone came up to you at a cocktail party and excitedly said, “I’ve got a great investing tip for you! Be properly diversified among equities, fixed income and cash-equivalents”? We’ll guess “never”. Odds are that when hot tips are passed around, they relate to a soaring tech stock, a new crypto-currency, or even a supposedly sure-bet mining exploration play. It’s human nature, right? People want a get-rich quick play, a way to bypass the slow and steady work of building a durable portfolio over time. Nevertheless, the fact remains that many investors do not spend nearly enough (or any) time looking at their basic asset allocation. But as Ben Carlson, a noted investing expert in the U.S., observes, asset allocation tends to be far more important for most people than what stocks they buy or sell. Long story short: focus less on individual companies and more on having the right asset class mix.
Having No Plan
So many individual investors do not have a clear sense of what they’re investing for and how they intend to achieve the desired result. As a client of Assante, you know that we don’t operate that way: We’re big on planning. It’s why we sit down with you to get a sense of your unique situation, as well as your goals for the future. We then write an investment policy statement to keep you on the road to those objectives. Needless to say, we agree with the famous saying that those who fail to plan, plan to fail.
Having the Wrong Time Horizon
If you turn on the financial news, you would think that the everyday investor should be buying and selling frequently. The truth is that the financial media caters to market professionals who aren’t investors so much as traders. And the risk for you, a long-term investor, is that you get caught up in the excitement.
Source: Ben Carlson, A Wealth of Common Sense
Part of being a successful investor does involve making the right decisions: taking intelligent risks that lead to long-run capital growth, for example. Yet as you can see, success also comes by avoiding certain errors that some individual investors make. And with apologies for the tennis pun, when people steer clear of these common errors, it’s usually reflected in their returns.