You have tried to invest as your effort to financially secured life. That is very good. But you as you will experience further along the road, you will find that many have failed as an investor. Mostly because they don’t know the common mistakes made by other investors, as the failing investors usually don’t share the reasons they fail.
It is good if we can learn from the successful ones, but today we are going to learn from investment mistakes made by others. Hopefully by realizing it, we can avoid them and be a better investor.
1. Expect What Others Expect
Well even if you are an investment savvy and have studied financial in your life time, there are loads of things about investment that might never be familiar for you. Even Warren Buffett, the investment titan in the world, confessed that he did not understand the investment of internet companies. You should not be ashamed if there is something that you don’t understand.
But worse from not understanding it, you build your expectation on others’ expectations. You listen to the talks in the bar or in the market chat rooms, and you follow the trend blindly. Don’t. Sometimes people only give out information that they know will not be worth as much, and keep the valuable ones.
It is better to take your time learning it rather than follow rumor. If you don’t think you have time for it, at least have a fee-based consultant to give you advice. At least you will avoid the investment mistakes of conflict of interests.
2. Put All Your Eggs in 1 Basket
Everyone knows this, yet not everyone practices it. Don’t put all your money in one type of investment. They all respond differently toward different situation.
Ideally, you’re spreading your investment money across completely different types of assets – cash, bonds, stocks, real estate, maybe even things like precious metals or collectibles.
3. Lose Track on Your Investment
You want to monitor your investment closely. You don’t have to stare it every day, but at least spend your time monthly or even every quarter to see whether your investment is going according to your expectation.
Situation changes all the time. And as the situation changes, you want to adjust your portfolio accordingly to make the best out of it. Equity for example are great for thriving economic environment. But as the economic is worsening, you want to switch to
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4. Fail to Set Clear Investment Goals
Just like everything else, you need to have an objective. It can be stable income in retirement or even larger goals in life, such as world travel. Whatever it is you should know what you want for your investment, when you want it, how you want it, whether in a large cash withdrawal or monthly payment.
Having a clear investment goal will help you in determining what kind of assets you want to have in your portfolio and what to do if the expectation is not met.
5. Unwillingness to Accept Losses
There is an idiom in the capital market: buy high sell low. It is counterintuitive I know. But because people are unwilling to accept losses, they would prefer to let the assets deteriorate to almost no value rather to sell it.
An active selling action means that they are accepting their losses with no point of return. But if you just let the assets value to be as low as it can be, you could argue that someday it might just recover from its losses and give you returns. It usually never does, but investors keep making that mistake anyway.
On the other hand, if the asset value is increasing, even way above their original estimation, investors are hesitant to sell. Why? Because they are afraid of losing an opportunity of higher return. Usually it ends with the value came down way below their expectation.
6. Trading Incessantly
Some people get really into the “game” of playing around with their investments. They’ll react to the news that they hear and move their investments around all the time. The problem then is you wasting too much of your profit to fees and commissions as they are calculated with your transaction rather than your profit.
Beside investment is a long-term game. The way the investment studies were set up reflects on this. There is no single analyst willing to make an estimate of the next hour. They are looking for at least 6 months, and more commonly 1 year. So if the professional cannot give the idea what will happen in the next hour, why should you buy and sell the same asset just within the hour.
7. Decisions Triggered by Media or Rumors
The media always loves to make things larger than it is. The media also loves to hit that panic button hard. Consider the heading of an article: PT ABC Faces Bankruptcy as It Records Losses of Over IDR 1 Billion. Well that PT ABC is a IDR100 trillion company and losing that amount of money is small thing for them. Beside you cannot really expect a company would profit all the time, right?
The fun things about media is they usually are the last to know, unless when they make the news themselves. There is an idiom in the capital market: Buy on Rumors, Sell on News. It shows how the experienced investors usually react on the news.
They are relying more on rumors among institutional investors, making their own analysis on facts and information, and may be getting information out of the people in the company or insider trading. Of course this is illegal, but if you can, what stop you.
8. Letting emotions get in the way
There are two major emotions that usually play a significant roles in making financial decision: Greed and Fear. CNN even built a Fear & Greed Indicators to give indications the emotions the market is feeling.
How do you know if you are controlled by greed? It is when you are having difficulties to stop your trading even though you have exceeded your initial expectation.
And how do you know if you are making this investment mistakes of being too scared and not simply being careful? Well, if you just cannot find any positive sign in the general market (not just in your asset).