The CFA Institute (Chartered Financial Analyst) โ an international organization for the certification of financial professionals โ has published common investment errors and tips for avoiding them. These recommendations are relevant both for those investors who have already signed an agreement with a financial adviser, and for those who do not use such services and do everything independently.
Mistake # 1: High expectations
Whether you like it or not, the simple fact of investing will not solve all your financial problems. It is easy to think that if you invest, then everything will be perfect, and all your problems will be solved. This is especially true when you are listening to investment advisors who promise high returns..
The best thing any investor can do is think realistically. Look at what the stock market actually predicts, not only in a year, but also how many years ahead, and use these numbers for your expectations.
Mistake # 2: Lack of clear investment goals
For most people, this is not a problem. Their investment goal is a stable pension income, that is, the best social security.
It is harder to understand when people invest for reasons other than providing a decent pension. If you do not invest in old age, you need to find out exactly why you are investing, how far you are from the goal, and how much risk you can take. You must understand what you are pursuing. This may be: buying real estate, capital to pay for a childโs studies, or the amount of funds needed to open a business.
Mistake # 3: Weak Diversification
Mistakes in investing will not do without this. Diversification of investments means that your money is distributed in many different things. Ideally, you distribute your investment money between completely different types of assets: cash, bonds, stocks, real estate, or even precious metals and collectibles. You will feel safer and not lose everything if one of your investments falls in value.
The problem is that most people do not diversify their investments enough, especially when it comes to retirement savings.
Mistake # 4: Attention focused on a short period of time
The market is growing rapidly and also falling strongly, gaining or losing a few points in one day, and this can be a really nervous trip for some people. If you have $ 100,000 in the stock market and it suddenly fell 4% in one day, then you just lost $ 4,000. This is enough to start to panic.
However, the fact is that if you have invested in the stock market, then a short period does not matter here. Reasonable investors always invest long-term and in this perspective there is always a fairly steady (albeit uneven) upward trend. In other words, the market has historically always shown growth. If you press the panic button for one day, week, or even year, you will end up hurting yourself a lot by making investment mistakes and losing more than you could get.
Mistake # 5: Buying Rising and Selling Falling Stocks
Many peopleโs instincts tell them that they need to buy shares after the day or week when they showed themselves well in the market. Shares rose 10% in the last quarter, which means that it seems that we need to purchase them. On the other hand, people often instinctively start selling stocks when they quickly fall. They see losses over the last month or quarter, are scared and panicked. Such strategies constantly fail investors.
Therefore, it is imperative to conduct your own research of an asset before buying or selling. First of all, you must believe in numbers, multipliers and cold math..
Mistake # 6: Frequent Trading
Some people get into the โgameโ with their investments. They respond to the news they hear and constantly redistribute their assets. The problem when you do this is that, as a rule, you generate a lot of transaction fees and commissions for transactions, as well as a lot of tax consequences. Often, news is what generates your investment mistakes..
Many brokerage companies charge a fee each time you buy or sell securities. If you do this too often, fees reduce your income..
In addition, it can quickly turn your tax situation into a mess, with a combination of short-term and long-term profits and loss of capital. Itโs better to have a diversified plan and always stick to it without reacting to the news..
Mistake number 7: Paying a large number of commissions
Brokerage companies charge various fees when you buy and sell assets. Moreover, financial planners also work with commissions. If you invest in something that has high transaction fees, your money goes.
Itโs much better to find out how to minimize commission fees and find investment opportunities that go with little or no transaction fee..
Mistake # 8: Shifting Taxes
People often focus on the tax consequences of their investment decisions, even to the detriment of themselves. Yes, taking a step to help yourself pay low taxes may be a good decision, but the taxes a person pays on return on investment are often small compared to a good investment strategy..
If the opportunity comes to reduce taxes without losing investment profits, take advantage of this, but if you make a choice, first of all, so as not to pay a few hundred rubles, you almost always guarantee yourself the worst result.
Mistake # 9: Irregular Investment Review
If you have allocated money to several different assets, some of them will have better returns than others this year. Suppose you want to keep a 50/50 ratio between two โbasketsโ in your portfolio and, at the beginning of the year, you have $ 50,000 each. Suppose that during the year, the first investment grew by 20%, while the second remained at the same level. Now you have $ 60,000 in the first โbasketโ and $ 50,000 in the second, so your money ratio has shifted and now is 55/45.
If this growth continues further, you will be far from your goal and break the strategy, as in the first โbasketโ you will have more funds and the diversification balance will be violated. Therefore, adjust your investments promptly to keep your portfolio assets in the proportion you need..
Mistake # 10: Minimum or Maximum Risk
If you take too much risk, you are prone to panic and, as a result, will have a lower balance at the time of calculating profits than expected. Emotions and impulsive decisions with an abundance of risky operations will harm the cold calculation, which the stock market loves so much. On the other hand, if you take little risk, you will not get strong growth in investment and profits. Find a middle ground and, along with high-risk and profitable securities, select more conservative and stable assets.
Mistake # 11: Media Response
The media loves the hype. They will work to convince you that you need this or that investment, because this is the best thing in the country. The next thing they will tell you: everything falls apart, the sky falls and expectations did not materialize.
As a rule, none of this is true. The media simply knows that fear is what attracts viewers and readers. Be calm and measured โ do not respond to hype, especially when it comes to investments.
Mistake # 12: The Pursuit of Profitability
If you see an asset similar to yours, but with better returns, it is not always worth moving on to it. First, the results achieved by an unfamiliar company in the past do not indicate its future success. Secondly, the higher the yield, the higher the risk (in general).
Mistake No. 13: Lack of due diligence
Just because some article suggested investing in something or someone on TV said that a certain investment would work just fine, you donโt have to invest your money there right away.
Quite often, media comments from investment advisors that have their own reasons for promoting a particular asset have nothing to do with your own financial success. So take the time to independently research a new investment or do nothing. Never follow recommendations blindly..
Mistake No. 14: Working with the wrong assistant
As in any profession, in the financial world there are good consultants and bad ones. There are several signs of worthless advisers and your investment mistakes may also depend on their incorrect recommendations..
A sure sign of a dubious adviser is that he does not ask you many questions. A good consultant wants to know who you are and what are your reasons for investing. Another sign is that it cannot explain why you should want to invest somewhere.
In general, it is better to give preference to those financial advisors who do not make money on commissions from specific investments (since the opposite will give them an incentive to push you to invest, regardless of your financial situation).
Mistake # 15: Emotions
The worst investment decisions and investment mistakes are based on emotions, and these emotions can come for many reasons: fear for the future, anger or sadness about key relationships, irrational happiness.
The best investment plan is a plan that is considered with minimal emotions and one that you adhere to throughout your emotional highs and lows.
Mistake # 16: Ignoring Inflation
Inflation is a reality. Prices continue to rise, and if you do not understand this in the future, you will be the loser. Include inflation in the equation. Suppose that prices go up (at least) by 3% per year and thus you will need a larger amount relative to your goals. Yes, it makes it a little further from you, but an additional calculation will allow you to better understand your investments and get around these investment mistakes.
Mistake # 17: Lack of Savings
You cannot change the ups and downs of the economy, but you can change your daily behavior. You can choose to save on unnecessary things, which will give you more money for investment. You can find a good balance that will take into account your future and current needs..
Five key steps to solve investment problems
ย 1 step: Learn how to invest
Knowledge is power. The most important thing you can do is study, study, study and never stop learning. Investing is actually not that difficult as long as you are ready to spend time learning about it. An example of a good book for slow reading is The Intelligent Investor by author Benjamin Graham. At any moment when you do not understand something, stop and re-read the moment. Each time a term appears that is unfamiliar to you, stop and find out from other sources what it means in order to understand what is being discussed. Look at a lot of real world examples. Then grab another investment book and so on. Soon it wonโt seem scary.
Step 2: Manage your investment yourself
Once you have the knowledge, managing your investment will seem like an obvious step. Why donโt you manage your investments if you understand how to invest? Taking independent control, you refuse intermediaries between investments and you and have the opportunity to freely choose any and the best assets. Almost every investment company offers more than enough online tools for personal management, use this.
Step 3: Follow a Simple Strategy
The simpler the better. Come up with a very simple portfolio, scattered across two or three different asset classes. This can be domestic stocks, international stocks, bonds, cash, real estate, etc. Choose about 10 โ 12 securities and observe the proportion of investments 70/30 (stocks / bonds).
Set up an automatic investment plan, and then just forget about everything. Check it from time to time and adjust your automatic investments accordingly, reinvest dividends and keep your portfolio in balance.
Step 4: Wait ups and downs
Stocks will rise and fall. Bonds will rise and fall. Real estate will rise and fall. Do not panic. Never forget that you are at the beginning of a long journey. In a panic, running along it, folding or turning back based on a short-term decline or jump is a bad decision for long-term positions, especially if you pay taxes, duties and commissions.
Step 5: Call Paid Financial Advisers Only for Major Problems
At some point, a really difficult question or situation will probably arise, and you will become unsure of your actions..
This does not mean that the time will come to panic or to fix everything at once. This means that you need to call a paid financial adviser who will not waste time trying to sell you some investments that are outside your range of interests.
A good financial adviser will ask you a lot of questions, find out where you are going, and help you set up your portfolio so that you stay on the path you want to be..
If you follow these steps, you will be assured of the majority of monetary problems and the mistakes of investing will not touch you, as a matter of course..
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